Fed faces limits on lending powers during crises

10-May (Financial Times) — The Federal Reserve’s ability to give emergency loans to distressed institutions in a crisis would be restricted under legislation being prepared by lawmakers who want to stop “backdoor bailouts”.

The proposed legislation — a striking challenge to the Fed from a bipartisan pair of senators — will reignite debate over whether the US succeeded in ending banks’ “too big to fail” status with its response to the financial crisis.

The Fed contained panic during the crisis by offering emergency loans to institutions facing liquidity crunches. But, after the meltdown, Congress introduced restrictions to prevent the bailout of single struggling entities, while preserving Fed powers to provide liquidity to groups of firms.

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PG View: Of course too-big-to-fail banks still exist. Now, Congress is seeking to hamstring the Fed, even as that next crisis draws ever-nearer.