The Federal Reserve Board Approves Cut to Its Emergency Lending Powers

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A major approval by the Federal Reserve Board on Monday effectively limits the power of the board to provide emergency lending assistance. The move was made following the decision to provide a bailout to banks that were deemed “too big to fail.” AIG (AIG) and Citigroup (C) were both bailed out in 2008.

Congress demanded a change to the central bank’s policies following the bailout, and this is the change that has materialized.

Unanimously approved during an open meeting, emergency lending cannot be provided on a tailored basis to specific firms any longer. Instead, a broad-based emergency lending package would need to be provided. This will allow the Federal Reserve to offer lending for larger financial market problems rather than firm-specific issues.

A step in the right direction, many politicians believe that the wording of the regulation is not precise. Many of these politicians state that the presence of vague wording may not curtail the types of emergency lending that was given in 2008.

Future crisis lending will only be available if major firms are eligible for the lending program. Firms that have not paid undisputed debts in 90 days will not be allowed to receive funding.

In all, the Federal Reserve provided emergency programs valued at $710 billion in both loans and guarantees, not accounting for asset and bond purchases made by the Fed.

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