Federal Reserve: New Rule Tightens Lending Conditions

Source: Source: http://www.flickr.com/photos/16224308@N05/

Source: http://www.flickr.com/photos/16224308@N05/

The Federal Reserve proposed a new rule Monday, which would alter its authority to lend money. ”As required under the Dodd-Frank Act, the proposed rule 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,” the Fed said in a statement.

Once in effect, the rule would impose tighter restrictions on the Fed’s lending abilities. It formalizes processes described in the Dodd-Frank Act, for example, one provision “sets forth the process that the Board must undertake to authorize a Reserve Bank to extend credit under section 13(3) of the FRA.” Section 13(3) of the Federal Reserve Act, or FRA, gave the Fed the power to extend credit in “unusual and exigent circumstances,” when at least five Board members agreed to do so.

The bank who was issuing the loan also needed to “obtain evidence before extending the credit that the borrower is unable to secure adequate accommodations from other banking institutions,” and that credit extension needed to be secured in some manner. These four conditions were amended by section 1101 of the Dodd-Frank Act. The Fed’s lending powers became limited “to extending credit to participants in a program or facility with broad-based eligibility,” and approval from the Secretary of the Treasury was needed prior to emergency lending, among other conditions. Now, the Fed is adding more guidelines to its practices.

One of the new sections would make it a requirement that the Fed documents “the justification for its authorization, including describing the unusual and exigent circumstances that exist and the intended effect of the program or facility.” Additionally, the Fed will have to disclose to the public a description of the program, and its terms. ”Broad-based eligibility” is further defined, and no programs can be ”established for the purpose of assisting a single and specific company to avoid bankruptcy.”

The comment period lasts until March 7, 2014. Its notice, the Fed states that the “rules establish procedures governing lending activity,” and therefore, the Board does not believe comment is required by law. “Nevertheless, the Board also believes that there is significant value in obtaining public comment on the proposed rule in this instance.”

The Fed has been promoting greater transparency. Critics, such as Republican Kentucky Senator Rand Paul, do not think Fed programs have gone far enough to meet this goal, leading him to introduce the Federal Reserve Transparency Act of 2013.