Connect with the House Financial Services Committee
Get the latest news:
Follow us on Facebook:
Follow us on Twitter:
___________________________________

On Thursday, February 15, 2024, at 10:00 a.m. (ET) Subcommittee on Financial Institutions and Monetary Policy Chair Congressman Barr and Subcommittee Ranking Member Congressman Foster will host a hearing entitled, “Lender of Last Resort: Issues with the Fed Discount Window and Emergency Lending.”

___________________________________

Witnesses for this one-panel hearing will be:

• Hal Scott, Nomura Professor of International Financial Systems, Emeritus, Harvard University

• William Nelson, Executive Vice President and Chief Economist, Bank Policy Institute

• Professor Kathryn Judge, Harvey J. Goldschmid Professor of Law and Vice Dean for Intellectual Life, Columbia Law School

___________________________________

Background

Central banks have long been instructed to act as a lender of last resort providing liquidity freely during financial panics and periods of financial stress. Central banks lend to solvent firms on good collateral at penalty rates, when otherwise solvent banks come under pressure to quickly liquidate collateral.

There are two main ways in which the Federal Reserve (Fed) provides lender of last resort credit to stressed firms. The first is through the “discount window” to specific banks. The second is through emergency lending using authority provided in Section 13(3) of the Federal Reserve Act to provide credit in “unusual and exigent circumstances” when stresses are felt by many firms during periods of broad-based liquidity strains (including periods of “crisis” or “panics”).

Since the financial crisis in 2008, the Fed has established a large number of emergency lending facilities and programs, including many in response to the economic shutdowns that occurred during the COVID-19 pandemic. Most recently, the Fed established the Bank Term Funding Program in the wake of the March 2023 bank failures. Issues to be explored in the hearing include:

• The Fed’s lender of last resort function, including discount window lending policies and procedures, emergency lending facilities, and related regulatory liquidity requirements;

• Recent steps taken by the Fed to ensure that banks have “prepositioned” collateral;

• Issues of “stigma” associated with banks’ accessing the discount window;

• Increased reliance on the Fed’s emergency lending powers over time and debates about whether the Fed should limit or expand its lender of last resort activities; and

• Interplay between the Fed’s discount window lending and Federal Home Loan Bank credit, including experiences during the March 2023 bank failures.

___________________________________
Hearing page: …(read more)

LEARN MORE ABOUT: Bank Failures

REVEALED: Best Investment During Inflation

HOW TO INVEST IN GOLD: Gold IRA Investing

HOW TO INVEST IN SILVER: Silver IRA Investing

Lender of Last Resort: Issues with the Fed Discount Window and Emergency Lending

In times of financial crisis, central banks around the world act as the lender of last resort to provide emergency liquidity to financial institutions. In the United States, the Federal Reserve serves as the lender of last resort through its discount window and emergency lending facilities. While this function is critical for maintaining financial stability, there are various issues and challenges associated with the Fed’s emergency lending operations.

The Fed’s discount window is a facility through which eligible depository institutions can borrow funds from the central bank on a short-term basis to meet temporary liquidity needs. This window plays a crucial role in providing liquidity to banks, especially during times of market stress. However, there are several issues with the discount window that have been a cause for concern.

One of the main issues with the discount window is the stigma associated with borrowing from it. Banks are often hesitant to use the discount window due to the perception that it signals financial weakness and can damage their reputation. This stigma can deter banks from accessing the liquidity they need, potentially exacerbating liquidity strains in the financial system.

Another issue with the discount window is the lack of transparency and disclosure surrounding its operations. Historically, the Fed has been reluctant to disclose the identities of banks that borrow from the discount window, as well as the terms of the loans. This lack of transparency can lead to concerns about moral hazard and the potential for misuse of the facility.

In addition to the discount window, the Fed also has the authority to provide emergency lending to a broader range of institutions under its Section 13(3) authority. This authority was used extensively during the 2008 financial crisis to provide emergency assistance to non-bank financial institutions such as AIG and Bear Stearns. However, the use of Section 13(3) authority has raised concerns about the scope of the Fed’s emergency lending powers and the potential for regulatory capture.

There have been calls for greater oversight and accountability in the Fed’s emergency lending operations to address these issues. The Dodd-Frank Act of 2010, for example, introduced several reforms aimed at increasing transparency and oversight of the Fed’s emergency lending activities. These reforms included requirements for the disclosure of the identities of borrowers and the terms of emergency loans.

Despite these efforts, there are ongoing debates about the appropriate scope and limitations of the Fed’s emergency lending powers. Some argue that the Fed should have more discretion to provide emergency assistance to a wider range of institutions during times of crisis, while others are concerned about the potential for abuse and moral hazard.

Overall, the Fed’s role as the lender of last resort through its discount window and emergency lending facilities is a critical component of the financial system. However, there are various issues and challenges associated with these operations that need to be carefully considered and addressed to ensure the effectiveness and integrity of the central bank’s emergency lending function.