Bagehot’s Legacy
HFSC Financial Institutions Chair Barr (R-KY) last week invoked the patron saint of central banks, Walter Bagehot, reminding his hearing (see Client Report LIQUIDITY34) that central banks are to use their lender-of-last-resort powers only for solvent banks and then only at a premium. To do other, Bagehot said and Mr. Barr repeated, is to encourage moral hazard, the sin the chair went on to attribute to the modern-day Federal Reserve. He also floated legislation to curb the Fed’s 13(3) emergency-liquidity powers, legislation on which he will have a surprising ally, Sen. Elizabeth Warren (D-MA). She is a long-time advocate of tougher restrictions on Fed emergency liquidity (see FSM Report FEDERALRESERVE21). Still, we think the odds of legislation in this Congress are small, with Congress, the agencies, and banks sure instead to focus on what will be demanded of them in terms of discount-window readiness, FedWire resilience, FHLB access, and additional liquidity. Vice Chair Barr is less enthusiastic than Acting Comptroller Hsu about new liquidity standards, but much is afoot and thus so are we. More to come…