Establishing credible rules for Fed emergency lending

Charles W. Calomiris, Douglas Holtz-Eakin, R. Glenn Hubbard, Allan Meltzer and Hal S. Scott

Journal of Financial Economic Policy, 2017, vol. 9, issue 3, 260-267

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.

Keywords: Central banking; Systemic risk; Dodd-Frank act; Federal reserve; Emergency lending; Bailouts; Lender of last resort; Moral hazard; E58; G28 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfeppp:jfep-01-2017-0006

DOI: 10.1108/JFEP-01-2017-0006

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