Newspaper article International Herald Tribune

Fed Still Owes Rules on Emergency Loans

Newspaper article International Herald Tribune

Fed Still Owes Rules on Emergency Loans

Article excerpt

The Fed has yet to establish procedures to safeguard taxpayers when making emergency loans. To some analysts, the Fed is stalling because it values the need to act freely in times of crisis.

After the Federal Reserve lent more than $1 trillion to big banks during the 2008 financial crisis, the U.S. Congress required the central bank to devise specific ways of protecting taxpayers when doling out emergency loans to financial institutions.

But nearly three years after that overhaul became law, the Fed still has not established those regulations.

The delay involves a crucial but little-noticed part of the Dodd- Frank act, the sweeping financial-sector overhaul that Congress passed in July 2010. One part of the legislation focused on the Fed. While the government used many different tools to shore up the financial system during the crisis, Congress was well aware that the Fed had played a decisive role.

The central bank made huge loans to scores of domestic and foreign banks as markets seized up, dwarfing bailouts like the Troubled Asset Relief Program. But the identities of the borrowers were not disclosed at first, stoking concerns that the Fed had carried out a vast stealth bailout of Wall Street.

Against that backdrop, Dodd-Frank required the Fed to develop policies and procedures to safeguard taxpayers when making emergency loans "as soon as is practicable." To some banking specialists, the delay suggests the Fed is stalling because it values the need to act freely in times of crisis.

"The Fed might be thinking, 'We don't want to make a lot of rules that might hinder us from acting in an emergency situation that we can't anticipate,"' said Michael Bradfield, a former general counsel at the Fed.

When asked, Barbara Hagenbaugh, a spokeswoman for the Fed, did not say when the new rules would be completed.

Even without freshly written rules from the Fed, the Dodd-Frank legislation immediately introduced measures to make the central bank more accountable. For example, the Fed must now file regular and detailed reports to Congress if it undertakes any emergency lending.

Still, the overhaul went much further to set conditions on Fed loans during a crisis, and it is those measures that the central bank has yet to complete.

It has to have policies in place to prevent losses on emergency loans. For instance, the assets pledged to the Fed in return for the loans would have to be sufficient to absorb losses should the borrower default.

In an interesting twist, Congress also requested that when a bank participates in an emergency loan, its chief executive must certify that the bank is not insolvent at the time. The Fed would need to set out procedures for doing that.

"I think the Fed should have reasonably broad discretion to deal with systemic issues," Mr. Bradfield said. …

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