Wednesday, August 27, 2014

House and Senate Members Ask Fed to Tighten Emergency Lending Proposals

Senators Elizabeth Warren (D-MA) and David Vitter (R-LA), and Representatives Scott Garrett (R-N.J.) and Michael Capuano (D-MA), and colleagues in the Senate and House, sent a bi-partisan letter to Federal Reserve Board Chair Janet Yellen calling for the Fed to strengthen restrictions on its emergency lending authority in its rulemaking implementing Section 1101 of the Dodd-Frank Act.. During the financial crisis, the Fed invoked its emergency lending authority to provide over $13 trillion in loans primarily to a select group of large financial institutions. These loans were long-term and offered at below-market rates in what the lawmakers called a bailout in all but name of financial firms regarded as "Too Big to Fail."

The letter also was signed by 11 additional members of the Senate and House: Senators Sherrod Brown (D-OH), Mark Begich (D-Alaska), Mazie Hirono (D-Hawaii), and Edward Markey (D-MA), and Representatives Walter Jones, Jr. (R-CA), Stephen Lynch (D-MA), Michael McCaul (R-TX), Gwen Moore (D-Wis.), Keith Ellison (D-MN), Leonard Lance (R-N.J.), and Tom Cotton (R-Ark.).

Congress enacted Section 1101 to ensure that such bailouts could not happen again, explained the Senators and Representatives, yet the Fed's proposed rule implementing Section 1101 does not place meaningful restrictions on the agency's emergency lending powers. Under the proposed rule, a financial firm could rely on the Fed’s emergency lending authority indefinitely. This is not acceptable to the lawmakers, who asked that the final rule require that a loan obtained through the emergency lending authority be paid back in full within a set time period, with no rollover permitted. The Fed should also establish procedures for the orderly unwinding of any emergency lending program or facility, which will reinforce the idea that these are truly temporary.

The proposal defines an insolvent financial firm as one that is in bankruptcy proceedings. This definition must be broadened so that the Board could not use its emergency lending program to save a firm that is on the verge of bankruptcy. The purpose of Section 11 is to ensure that firms that would be insolvent absent emergency lending assistance from the Fed would be put into bankruptcy or orderly resolution under Dodd-Frank Title II rather than receiving extended liquidity support.

The proposed rule’s narrow definition of broad-based eligibility must be expanded to inject liquidity broadly into the financial system, said the letter, beyond an authority for emergency lending to only a handful of financial firms.

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