The House Financial Services Committee has approved a new version of legislation intended to restrict the Federal Reserve’s ability to provide emergency-liquidity support under Section 13(3) of the Federal Reserve Act. Similar in some respects to bipartisan legislation introduced in the past by Sen. Warren (D-MA) and a former GOP senator, this bill would significantly complicate efforts to provide emergency liquidity to financial-services firms in acute-stress scenarios, possibly exacerbating them in ways that threaten U.S. or global financial stability. Under the legislation, Congressional approval would be required for extended use of FRB emergency-liquidity support. Further, if support is not forthcoming, then recipients of emergency support – which would in any case be available only under acute stress and then at penalty rates – would need promptly to repay it, likely triggering the financial-stability risk the Fed sought to allay with its emergency liquidity.
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