Fed Bows to Criticism Over Emergency Lending Rule
By John Heltman

WASHINGTON — The Federal Reserve Board unanimously approved a final rule Monday implementing changes to its emergency lending authority that includes significant concessions to critics of the original proposal. The Dodd-Frank Act imposed new restrictions on the Fed’s ability to provide emergency support, which had previously been mandated under Section 13(3) of the Federal Reserve Act. Dodd-Frank requires such emergency actions to be limited to benefiting broad-based market sectors rather than individual firms. But critics, including some lawmakers, argued the 2013 proposal could allow the central bank to work around the restrictions and still aid specific companies. Observers complained in their comments the Fed’s proposed definition of a “broad-based” facility could potentially be interpreted as containing as few as two firms.To address this issue, the final rule specifically defines “broad-based” as containing at least five institutions, and, according to Fed staff, the rule is written in a way to make eligibility as inclusive as possible. The final rule also says that a facility may not be created to aid “one or more” specific companies in avoiding bankruptcy. Karen Shaw Petrou, managing partner of Federal Financial Analytics, said there is no mistaking the political influence that the Warren-Vitter bill had on the Fed’s decision to make concessions.  “The Fed saw the political handwriting on the wall because it’s now up there in neon,” Petrou said. “The FRB is fighting a last-ditch battle to save its monetary-policy powers and thus decided to concede on emergency lending.”