Congressional critics of the Federal Reserve’s bailout powers are not satisfied by the central bank’s effort Monday to tighten its own rules on when it can rescue banks, saying the Fed has not gone far enough to rule out future bailouts.
In a statement issued following the Fed’s vote on the rule Monday morning, House Financial Services Committee Chairman Jeb Hensarling, R-Texas, said that “‘too big to fail’ is unfortunately alive and well and this rule from the Federal Reserve doesn’t change that.”
“Indeed, by leaving the door wide open to future taxpayer-funded bailouts, this final rule compounds the moral hazard problem that lies at the core of ‘too big to fail,'” Hensarling added.
Hensarling called on Congress to pass Fed reform legislation the House approved earlier this month that would set even more restrictive limits on the Fed’s emergency lending power.
Both conservatives and liberals have criticized the Fed for insufficient commitment to avoiding future bailouts along the lines of the ones given to insurance firm AIG and investment bank Bear Stearns during the financial crisis.
The Fed proposed the rule, required by the 2010 Dodd-Frank financial reform law, in late 2013. Skeptics said then that it didn’t go far enough and are saying similar things about the re-proposal Monday.
“There are still loopholes that the Fed could exploit to provide another back-door bailout to giant financial institutions,” Sen. Elizabeth Warren, D-Mass., told CNNMoney. Warren’s office did not respond to an inquiry Monday.
Warren, a liberal known for her opposition to Wall Street influence in Washington, had written legislation with Sen. David Vitter, R-La., to place far more stringent terms on the Fed’s lending authority.
One idea from that bill made it into the Fed’s rule Monday, namely the provision that the Fed cannot create an emergency lending program unless at least five companies would be eligible to participate in it. That measure is meant to rule out the possibility of the Fed coming to the rescue of a single failing bank or other financial firm.
Marcus Stanley, policy director for the nonprofit group Americans for Financial Reform, identified the Warren-Vitter measure as one of several improvements in the rule.
But overall, Stanley said, the new rule falls short of what is needed to prevent banks from receiving bailouts in the future by allowing the Fed the discretion to extend emergency loans. He noted that the Fed would retain discretion to identify when a firm is insolvent and therefore ineligible for a loan, and to set the interest rate on loans to ensure that companies that do benefit from the Fed’s lending pay a penalty.
“They really have not precommitted in a really firm way to a more concrete limitation,” he said.
