Date
27 May 2017
Following criticism over the 2008 rescue of financial firms, the Federal Reserve has agreed to limit its emergency bailout powers. Photo: Bloomberg
Following criticism over the 2008 rescue of financial firms, the Federal Reserve has agreed to limit its emergency bailout powers. Photo: Bloomberg

Fed approves rule to limit its bailout power

The US Federal Reserve Board on Monday adopted a rule that limits its ability to extend emergency loans to failing financial firms.

The decision came after the central bank faced criticism earlier over its rescue of American International Group (AIG) and others during the 2008 financial crisis.

The new rule is designed to help end the notion of individual financial companies being “too big to fail,” by allowing the Fed to rescue only the broader financial system instead of individual companies, Reuters reported.

Under the rule, the Fed can make emergency loans that can potentially be used by at least five companies, but it cannot make more ad hoc rescues like its efforts to save AIG during the crisis.

The Fed adopted the rules after the 2010 Dodd-Frank financial reform law required the central bank to curtail emergency loans to individual companies and to insolvent companies.

As the financial crisis intensified in 2008, the Fed invoked its little-used emergency lending power to help stave off the failure of AIG.

It also lent money to JPMorgan Chase & Co to help reduce the bank’s potential losses from buying Bear Stearns, which was on the brink of collapse.

The Fed also enacted a series of more general emergency programs, in all providing US$710 billion in loans and guarantees to a wide range of financial companies. 

Critics have argued that the Fed overreached during the crisis, using its emergency authority in ways not clearly foreseen by lawmakers.

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RC

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