Barr Delivers Remarks at Hearing to Examine Issues with the Fed Discount Window and Emergency Lending
Washington,
February 15, 2024 -
Today, the House Financial Services Subcommittee on Financial Institutions and Monetary Policy, led by Chairman Andy Barr (KY-06), is holding a hearing entitled “Lender of Last Resort: Issues with the Fed Discount Window and Emergency Lending.”
Watch Chairman Barr’s opening remarks here.
Read Chairman Barr’s opening remarks as prepared for delivery:
“In performing lender of last resort functions, central banks have long been told to abide by recommendations memorialized by British journalist Walter Bagehot in the late 1870s.
“Bagehot advised that in panics and times of unusual liquidity needs, central banks should lend freely, at a penalty interest rate, to solvent borrowers who post good collateral.
“Following the speed of the bank runs last March, perhaps lending freely also means that the Fed should be prepared to lend quickly on good collateral.
“There are two main ways in which the Fed performs its lender of last resort function.
“One is by lending to financial institutions at the Fed’s discount window against good collateral to solvent borrowers.
“Another is by using lending authority in Section 13(3) of the Federal Reserve Act to make emergency loans in ‘unusual and exigent circumstances.’
“Among other things, today we will explore the difference between discount window lending and emergency 13(3) lending, whether we are relying on the Fed too much in times of stress, and the issue of ‘stigma’ that banks face in accessing the discount window.
“The recent history of increasing Fed intervention into private markets traces back to the financial crisis in 2008.
“At that time, the Fed used its emergency powers to lend to save individual companies that were teetering on the brink of failure, such as Bear Stearns and AIG.
“Those actions proved unpopular as the Fed appeared to be propping up individual companies and potentially exposing innocent taxpayers to private-sector losses.
“In partial response, the Fed’s emergency lending authority was amended in the Dodd Frank Act to provide greater clarity on liquidity requirements, more transparency in Fed emergency lending, and approval of the Treasury Secretary.
“Emergency lending was also changed to try to prevent the Fed from acting to save an individual firm by requiring that emergency lending must be undertaken in a broad-based program to provide support for more than just one single firm.
“Next, in 2019, in the face of liquidity shortages and volatility in money markets, including markets for Treasury securities, the Fed intervened using repo facilities that were eventually made permanent.
“Following that, at the onset of the pandemic, the Fed intervened further in markets.
“The CARES Act provided backstop funding at Treasury to help the Fed use its 13(3) authorities to massively expand its reach, lending far and wide as Congress instructed.
“Most recently, the Fed set up a new lending facility called the Bank Term Funding Program in response to the March 2023 bank failures and interest rate risks facing financial institutions.
“Following the bank failures, the Fed has reportedly been working to reexamine operations of its discount window, given that operations appeared, as Chair Powell has stated, ‘clunky.’
“Part of that reexamination involves the role played by Federal Home Loan Bank loans in the provision of liquidity to banks, which we can discuss today, though I am skeptical that the Home Loan Banks were integral to the Fed’s emergency lending clunkiness last March.
“As the Fed reexamines its operations, an open question is whether legislation may be needed to address some of the problems in the Fed’s liquidity provision present last March.
“Meanwhile, federal banking agencies appear to be examining new liquidity rules for financial institutions, some of which could have implications for markets for Treasury securities.
“Let’s all hope that the Fed does better at analyzing such things than it did with its under-analyzed recent Basel bank capital proposal.
“I thank our witnesses for appearing today and look forward to hearing their views on all these important issues.”
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