Working across party lines, Sens. Elizabeth Warren and David Vitter have introduced new legislation that would tighten the restrictions on the Federal Reserve’s bailout powers, with the goal of preventing a replay of the 2008 bailouts.
“If big financial institutions know they can get cheap cash from the Fed in a crisis, they have less incentive to manage their risks carefully — which further increases the chance of another financial crisis,” Warren, a Massachusetts Democrat, said on releasing the bill.
It’s the second Fed reform measure the bipartisan duo has introduced in the past week, as the Senate Banking Committee gears up to work through a financial reform package that could incorporate changes to the central bank. Vitter, a Republican, represents Louisiana.
The two also have proposed an overhaul of the way the Federal Reserve Board of Governors operates.
The bill introduced Wednesday spells out a number of terms that would have to be met for the Fed to disburse funds under its emergency lending authority.
Those include that any emergency lending program benefit at least five banks, go to only truly insolvent firms and offer money at a steep interest rate.
The 2010 Dodd-Frank financial reform law included language restricting the Fed’s bailout abilities, but some members of Congress regarded the ultimate rules written by the Fed as too broad and vague to prevent loans being offered to individual big banks under inappropriate conditions.
The Fed has resisted new limitations on those powers.
“Further restricting or eliminating the Fed’s emergency lending authority will not prevent future crises, but it will hinder the Fed’s ability to limit the harm from those crises for families and businesses,” Federal Reserve Governor Jerome Powell said in a speech in February.
The bill introduced Wednesday also would eliminate a wrinkle in current regulations that allows just two banks, Morgan Stanley and Goldman Sachs, to engage in the storage, transportation and management of physical commodities such as oil and uranium. Top regulators and lawmakers have raised concerns that those banks’ ability to directly manage commodities could cause trouble for the financial system if there were to be a large-scale accident such as a mine collapse or an explosion.
