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Establishing credible rules for Fed emergency lending

Author

Listed:
  • Charles W. Calomiris
  • Douglas Holtz-Eakin
  • R. Glenn Hubbard
  • Allan H. Meltzer
  • Hal S. Scott

Abstract

Purpose - The purpose of this paper is to propose reforms that would establish a credible framework of rules to constrain and guide emergency lending by the Federal Reserve and by fiscal authorities during a future financial crisis. Design/methodology/approach - The authors propose a set of five overarching rules, informed by history, empirical evidence and theory, which would serve as the foundation on which detailed legislation should be constructed. Findings - The authors find that the current framework governing emergency lending – including reforms to Federal Reserve lending enacted after the recent crisis – is inadequate and not credible, and that their proposed framework would constitute a credible balancing of costs and benefits. Practical implications - Adequate assistance to financial institutions would be provided in systemic crises but would be limited in its form, and by the process that would govern its provision. Originality/value - This framework would serve as a basis for establishing effective rules that would be credible, and that would properly balance the moral-hazard costs of emergency lending against the gains from avoiding systemic collapse of the financial system.

Suggested Citation

  • Charles W. Calomiris & Douglas Holtz-Eakin & R. Glenn Hubbard & Allan H. Meltzer & Hal S. Scott, 2017. "Establishing credible rules for Fed emergency lending," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 9(3), pages 260-267, August.
    • Handle: RePEc:eme:jfeppp:jfep-01-2017-0006
    DOI: 10.1108/JFEP-01-2017-0006
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    Citations

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    Cited by:

    1. Michael D. Bordo & John V. Duca, 2020. "How New Fed Corporate Bond Programs Dampened the Financial Accelerator in the Covid-19 Recession," NBER Working Papers 28097, National Bureau of Economic Research, Inc.
    2. Allen, Kyle D. & Hein, Scott E. & Whitledge, Matthew D., 2017. "The evolution of the Federal Reserve’s Term Auction Facility and FDIC-insured bank utilization," Journal of Financial Stability, Elsevier, vol. 31(C), pages 154-166.
    3. Bryane Michael & Svitlana Osaulenko, 2021. "TOWARD A NEW COMPARATIVE PUBLIC LAW OF CENTRAL BANK LEGISLATION: Designing Legislative Mandates for Central Bank Private Securities Assets Purchases and Nominal GDP Targeting," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 10(1), pages 5-38.

    More about this item

    Keywords

    Central banking; Systemic risk; Dodd-Frank act; Federal reserve; Emergency lending; Bailouts; Lender of last resort; Moral hazard; E58; G28;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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