Fed Proposes Limits to Emergency Lending Authority

The Federal Reserve Board proposed changes to its emergency lending authority in late December. The changes, which affect Regulation A, are required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

Putting new limits in place
Prior to the July 2010 passage of the Dodd-Frank Act, the Fed was authorized to lend to "any individual, partnership, or corporation" provided certain conditions were met, including the presence of "unusual and exigent" circumstances and the approval of at least five members of the Board of Governors. The proposed rule maintains those standards and others while placing additional limits on the Fed's emergency lending authority.

In general, the proposed amendment "is designed to ensure that any emergency lending program or facility is for the purpose of providing liquidity to the financial system, and not to aid an individual failing financial company," said a Board press release.

Central bank prohibition on lending to insolvent banks
The Dodd-Frank Act limits the Fed's emergency lending to programs or facilities with broad-based eligibility and requires the approval of the U.S. Treasury Secretary before making such loans. The law also requires the Fed to wind down its emergency facilities in a "timely and orderly fashion" and prohibits the U.S. central bank from lending to insolvent institutions. The proposal defines an insolvent borrower "any person or entity that is in bankruptcy, resolution under Title II of the Dodd-Frank Act, or any other Federal or State insolvency proceeding."

The Board developed the proposed rule in consultation with the U.S. Treasury Department. Public comments on the proposal are due by March 7.

January 15, 2014