Fed finalises bailout reforms
02 December 2015 New York
Image: Shutterstock
The Federal Reserve has agreed on a final ruling on its procedures for offering emergency monetary aid to failing financial institutions, under Section 13(3) of the Federal Reserve Act.
The Dodd-Frank Act, established in 2010, has limited the Fed’s powers on offering financial aid to programmes and facilities with "broad-based eligibility" that have been established with the approval of the Treasury.
The act’s current conditions also prohibit lending to financial entities that are considered insolvent, among other limitations.
“Emergency lending is a critical tool that can be used in times of crisis to help mitigate extraordinary pressures in financial markets that would otherwise have severe adverse consequences for households, businesses, and the US economy,” said chair Janet Yellen.
The final rule defines ‘broad-based’ to mean a programme or facility that is not designed for the purpose of aiding any number of failing firms and in which at least five entities would be eligible to participate.
Crucially, this definition crystalises the point that, under the revised Dodd-Frank Act, a lending programme should not be for the purpose of aiding specific companies to avoid bankruptcy or resolution.
The final rule also broadens the definition of ‘insolvency’ to cover borrowers that fail to pay undisputed debts due during the 90 days prior to borrowing or are determined by the Fed or lending reserve bank to be insolvent.
All emergency lending programs under Section 13(3) must also be approved by the Treasury.
The Fed’s board must also still find that “unusual and exigent circumstances exist as a pre-condition to authorising emergency credit programmes”.
Finally, regarding the inclusion of interest on any emergency loans, the Fed concluded that, unlike the original proposal, the interest rate for lent credit will be set at a premium level compared to the normal market rate.
Setting a premium rate “encourages repayment and discourages use of the programme as circumstances normalise”, according to the Fed.
The new conditions will come into effect on 1 January 2016.
The Dodd-Frank Act, established in 2010, has limited the Fed’s powers on offering financial aid to programmes and facilities with "broad-based eligibility" that have been established with the approval of the Treasury.
The act’s current conditions also prohibit lending to financial entities that are considered insolvent, among other limitations.
“Emergency lending is a critical tool that can be used in times of crisis to help mitigate extraordinary pressures in financial markets that would otherwise have severe adverse consequences for households, businesses, and the US economy,” said chair Janet Yellen.
The final rule defines ‘broad-based’ to mean a programme or facility that is not designed for the purpose of aiding any number of failing firms and in which at least five entities would be eligible to participate.
Crucially, this definition crystalises the point that, under the revised Dodd-Frank Act, a lending programme should not be for the purpose of aiding specific companies to avoid bankruptcy or resolution.
The final rule also broadens the definition of ‘insolvency’ to cover borrowers that fail to pay undisputed debts due during the 90 days prior to borrowing or are determined by the Fed or lending reserve bank to be insolvent.
All emergency lending programs under Section 13(3) must also be approved by the Treasury.
The Fed’s board must also still find that “unusual and exigent circumstances exist as a pre-condition to authorising emergency credit programmes”.
Finally, regarding the inclusion of interest on any emergency loans, the Fed concluded that, unlike the original proposal, the interest rate for lent credit will be set at a premium level compared to the normal market rate.
Setting a premium rate “encourages repayment and discourages use of the programme as circumstances normalise”, according to the Fed.
The new conditions will come into effect on 1 January 2016.
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