In an emergency the Federal Reserve has the power to provide liquidity to

In an emergency the federal reserve has the power to

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In an emergency, the Federal Reserve has the power to provide liquidity to depository institutions using standard, traditional tools, like open market operations and discount window lend-ing. Under section 13(3) of the Federal Reserve Act, the U.S. central bank also has authority to provide liquidity to nondepository institutions in “unusual and exigent circumstances.” Although the Federal Reserve has rarely exercised this LOLR clause enacted in 1932, it did use it during the 2007–09 financial crisis to prevent harm to the U.S. economy. Broad-based lending only.Under amendments enacted under the Dodd-Frank Act, emergency lending programs under section 13(3) of the Federal Reserve Act must be broad-based and not designed to support a single institution, among other require-ments. In addition, Congress requires that the Federal Reserve ensure that taxpayers are protected against losses.For a fuller discussion of how each of these lending tools works, see section 3, “Conducting Monetary Policy,” on page 20 (see also the 2013 Federal Reserve paper “Financial Stability Monitoring,” feds/2013/201321/201321pap.pdf).Federal Reserve lending under normal and “unusual and exigent” circumstancesAs a major financial crisis began to unfold in 2007 and its magnitude became clearer, the Federal Reserve invoked its statutory authority to lend to qualified institutions with adequate collateral. At its peak, Federal Reserve credit outstanding reached more than $1.2 trillion—but within four years it had abated to near pre-crisis levels as economic and financial conditions improved.$1,400$1,200$1,000$800$600$400$200$0Total credit outstandingJan 32007May 32007Sept 32007Jan 32008May 32008Sept 32008Jan 32009May 32009Sept 32009Jan 32010May 32010Sept 32010Jan 32011May 32011Sept 32011Jan 32012May 32012Sept 32012Jan 32013BillionsSource: Federal Reserve H.4.1 Statistical Release, Table 1. Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks. See the Economic Research & Data section of the Federal Reserve Board’s website, .
The Federal Reserve System Purposes & Functions 65 Macroprudential Supervision and Regulation of Large, Complex Financial Institutions Large, complex financial institutions interact with financial markets and the broader economy in a manner that may—during times of stress and in the absence of an appropriate regulatory framework and effective supervision—lead to financial instability. The Federal Reserve promotes the safety and soundness of these institutions through robust supervi- sion and regulation programs, two components of which are integral to its macroprudential efforts.

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