Reposted from Wonky News Nerd.
A group of federal lawmakers from both houses of Congress, led by U.S. Sen. Elizabeth Warren (D-Mass.) and Sen. David Vitter (R-La.),
sent a letter to Federal Reserve Chair Janet Yellen Monday calling on the Fed to strengthen restrictions on its emergency lending authority.
During the financial crisis, the Fed invoked its emergency lending authority to provide over $13 trillion in loans primarily to a select group of large financial institutions. These loans were long-term and offered at below-market rates.
Congress enacted Section 1101 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) to ensure that such bailouts could not happen again. However, the letter says, the Fed's proposed rule implementing Section 1101 does not place "meaningful restrictions on the agency's emergency lending powers."
The letter said that, unless the Fed’s lending power is reined in, “it can once again be used to provide massive bailouts to large financial institutions without any congressional action. The [Federal Reserve] Board’s proposed rule fails to strike the appropriate balance between promoting financial stability and mitigating moral hazard among the largest financial institutions.”
The lawmakers recommended that the Fed:
- Establish a clear time limit for a financial institution's reliance on the board's emergency lending.
- Establish procedures for the orderly unwinding of any emergency lending program.
- Adopt a broader definition of "insolvent."
- Expand the definition of "broad-based."
- Establish limitations, and a penalty rate, on lending terms.
Other signatories from the U.S. Senate were. Sherrod Brown (D-Ohio), Mark Begich (D-Alaska), Mazie Hirono (D-Hawaii) and Edward Markey (D-Mass.). U.S. House signatories were: Scott Garrett (R-N.J.), Michael Capuano (D-Mass.), Walter Jones, Jr. (R-Calif.), Stephen Lynch (D-Mass.), Michael McCaul (R-Texas), Gwen Moore (D-Wis.), Keith Ellison (D-Minn.), Leonard Lance (R-N.J.), and Tom Cotton (R-Ark.).
This is an issue Warren has been leading on. In the video below, Warren questioned Yellen at a Senate Banking Committee Hearing held on July 15.
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