Federal Reserve Issues Final Rule on Emergency
January 6, 2016 (IN10426)
M. Maureen Murphy
Marc Labonte, Specialist in Macroeconomic Policy (email@example.com, 7-0640)
M. Maureen Murphy, Legislative Attorney (firstname.lastname@example.org, 7-6971)
On November 30, 2015, the Federal Reserve (Fed) issued final regulations governing emergency lending under Section
13(3) of the Federal Reserve Act and implementing Section 1101 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (Dodd-Frank). In response to comments received during the rulemaking process which
criticized the proposed rules as lacking limits and meaningful definitions, the final regulations provide certain limits on
the Fed's discretion under Section 13(3) that did not appear in the 2013 proposed regulations. The final rule implements
the Dodd-Frank requirement that Section 13(3) lending provide liquidity to the entire financial system, as opposed to
assisting individual distressed institutions. Nevertheless, House Financial Services Committee Chairman Jeb
Hensarling issued a press release decrying the final rule as "leaving the door wide open to future taxpayer-funded
bailouts." H.R. 3189, as passed by the House on November 11, 2015, H.R. 2625, and S. 1320 would further curtail the
Fed's flexibility under Section 13(3).
Section 13(3) was enacted during the Great Depression in 1932. The Fed used this authority during the recent financial
crisis to prevent the failure of specific large financial firms, such as Bear Stearns and AIG, and for more broadly
available liquidity programs for various markets (e.g., primary dealers in the U.S. government securities market and
participants in the commercial paper market). CRS Report R44185, Federal Reserve: Emergency Lending includes an
appendix detailing the Fed's actions under Section 13(3).
Dodd-Frank retains certain basic elements of Section 13(3): the authority may be invoked only in "unusual and exigent
circumstances," pursuant to an affirmative vote of five Fed Board members, upon showing that the borrower cannot
"secure adequate credit accommodations," and upon presentation of satisfactory collateral. Dodd-Frank adds various
substantive requirements, as well as provisions requiring the Fed to report any actions to Senate and House
Committees. Specifically, the Dodd-Frank Act
replaced "individual, partnership, or corporation" with "participant in any program or facility with broad-based
required that assistance be "for the purpose of providing liquidity to the financial system, and not to aid a failing
financial company." It ruled out lending to an insolvent firm, defined as a firm in any bankruptcy, resolution, or
required that loans be secured "sufficient(ly) to protect taxpayers from losses," and that collateral be assigned a
"lendable value" that is "consistent with sound risk management practices";
forbade "a program or facility that is structured to remove assets from the balance sheet of a single and specific
required any program "to be terminated in a timely and orderly fashion"; and
required the "prior approval of the Secretary of the Treasury."
Table 1 outlines how the final rule implements the statutory requirements.
Table 1. Major Provisions of the Fed's Final Rule
Limits assistance to any "participant in any
program or facility with broad-based
Specifies that assistance be "for the purpose
of providing liquidity to the financial system,
and not to aid a failing financial company."
Requires that regulations preclude assistance
to insolvent borrowers, i.e., borrowers "in
bankruptcy, resolution ... or any other
Federal or State insolvency proceeding."
Forbids "a program or facility that is
structured to remove assets from the balance
sheet of a single and specific company."
Requires that loans be secured "sufficient[ly]
to protect taxpayers from losses," and
collateral be assigned a "lendable value" that
is "consistent with sound risk management
Requires "prior approval of the Secretary of
Specifies that the authority may be invoked
only in "unusual and exigent circumstances"
and that any program be "terminated in a
timely and orderly fashion."
Specifies that rates be consistent with the
Minimum of five eligible participants for a
program to meet the "broad-based eligibility"
Specifies that liquidity may be provided only
to an identifiable market or sector of the
financial system. Provides that a program
may not be used for a firm to avoid
bankruptcy or resolution. Specifies that a
program designed to aid one or more failing
companies or to assist one or more companies
to avoid bankruptcy, resolution, or insolvency
will not be considered to have the required
"broad-based eligibility." Requires borrowers
be current on their debt for 90 days before
borrowing. Permits the Fed to determine
whether the applicant is insolvent. Excludes a
firm from borrowing from the Fed if the
purpose is to help a third party firm that is
insolvent. Includes immediate repayment and
enforcement actions for firms that "make a
willful misrepresentation regarding its
solvency." Specifies that the Fed is under no
obligation to extend credit to a borrower.
Requires that the Fed assign a lendable value
to collateral at the time credit is extended.
Specifies that no program may be established
without the approval of the Secretary of the
Requires that the Fed provide "a description
of the unusual and exigent circumstances that
exist" no later than 7 days after establishing a
program. Requires that initial credit terminate
within one year, with extension possible only
upon a vote of five governors and approval
by the Secretary of the Treasury. Requires a
review of programs every six months to
assure timely termination.
Requires the rate charged must be a "penalty
statutory requirements governing the
rate," defined as a rate that is a premium to
the market rate in normal circumstances. It
must also be a rate that "affords liquidity in
unusual and exigent circumstances; and ...
encourages repayment of the credit and
discourages use of the program" when
"economic conditions normalize." Permits the
charging of "any fees, penalties, ...or other
consideration...to protect and appropriately
compensate the taxpayer.... "
Specifies that the borrower must be "unable to Requires evidence of inability of participants
secure adequate credit accommodations from in a program to obtain credit. The evidence
other banking institutions."*
may be based on economic conditions in a
particular market or markets; on the
borrower's certification of its inability "to
secure adequate credit accommodations from
other banking institutions," or on "other
evidence from participants or other sources."
Source: CRS, based on final rule.
Notes: *=requirement is largely unchanged by Dodd-Frank.