Sec. 201. Findings
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The Congress finds the following: The Federal Reserve performs an essential function for financial stability by serving as lender of last resort in order to— prevent the unnecessary failures of otherwise solvent United States banks and other financial institutions; reduce the likelihood of financial contagion and disruptions in United States financial markets; and minimize any adverse effects on real output and employment in the United States economy. In acting as the lender of last resort, the Federal Reserve, may— buy debt securities at fair market value; or provide short-term credit, secured by appropriate collateral in proper margin, to otherwise solvent banks and other financial institutions that encounter funding difficulties during a financial crisis.
Nevertheless, in its nearly 100-year history, the Federal Reserve has never clearly articulated its lender-of-last-resort policy. The absence of an official lender-of-last-resort policy has led to— increased economic uncertainty because no one knows with certainty how the Federal Reserve may behave; financially distressed firms seeking political solutions in the form of pressure from Congress or the Administration being placed on the Federal Reserve to act to save them; and a moral hazard problem from financial institutions taking greater risks and increasing leverage based upon assumptions of how the Federal Reserve will act, though there is no formal statement assuring how the Federal Reserve will act.
By establishing a formal lender-of-last-resort policy, the Federal Reserve would decrease uncertainty in the market during times of financial crisis and mitigate the moral hazards created by recent bailouts. An official lender-of-last-resort policy should provide that once a financial crisis has dissipated, the Federal Reserve should, in an orderly way, sell any debt securities that— the Federal Reserve acquired acting as lender of last resort; and the Federal Reserve does not normally own for its System Account.
Further, to reduce moral hazard, the Federal Reserve’s lender-of-last-resort policy should make clear that credit in any form will not be provided to insolvent banks or other financial institution.