July 15, 2010

Federal Reserve System Provisions

Title XI of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires that the Board of Governors of the Federal Reserve System and the FDIC promulgate regulations that establish policies and procedures for emergency lending and debt guarantee programs. It also provides for the appointment of a new Vice Chairman for Supervision of the Board and requires audits of certain programs and facilities implemented by the Board and Federal Reserve Banks since December 2007.

Emergency Lending Authority

The Board is required to promulgate regulations regarding its policies and procedures regarding emergency lending and facilities to solvent borrowers under the Federal Reserve Act. These regulations must (1) assist in providing liquidity to the financial system as a whole rather than support a single failing financial entity; (2) ensure that security is provided in exchange for a participant's entrance into such programs or facilities; and (3) facilitate the timely and orderly termination of such programs and facilities. In addition:

  • the Board is required to report to various congressional committees promptly following authorization of any emergency lending;
  • in the event of bankruptcy of a program or facility participant, the Board will have a claim for realized net losses on the loans made to the participant, and such claim is afforded the same priority as administrative expenses under the Bankruptcy Code; and
  • Federal Reserve Banks and credit facilities are subject to audit by the Comptroller to ensure that the policies and procedures in place are effective and do not inappropriately favor a single program participant.

Information to Be Made Publicly Available

The Board is required to make available to the public, via a link on its website, information related to audits of the Board and the Federal Reserve Banks, as well as copies of the Board's congressional reports related to emergency lending, credit facilities, discount window lending programs and open market operations. Unless otherwise determined by the Chairman of the Board, the release of information related to emergency programs is delayed for a set period of time following termination of such program or a particular transaction.

FDIC Debt Guarantee Program

The FDIC is required to create a program whereby it guarantees the obligations of solvent insured depository institutions and solvent depository institution holding companies, and their affiliates, in times of severe economic distress. Participation in this debt guarantee program is only available after a written determination by the Secretary of the Treasury, the FDIC, and the Board that a "liquidity event" exists, is subject to a maximum guaranteed amount set by the Secretary, and must be passed by a joint resolution of approval.

  • A "liquidity event" is marked by exceptional market circumstances which broadly impact market participants and generally hinder their ability to "sell financial assets without an unusual and significant discount" or "borrow using financial assets as collateral without an unusual and significant increase in margin," as well as a significant reduction in unsecured credit availability.
  • The solvency of an entity is established with reference to the value of the potential program participant's assets and its outstanding obligations to creditors.

In the event of bankruptcy of a participant in the debt guarantee program, the Corporation is to appoint itself as receiver for an insured depository institution or, as to other participants, make a determination regarding the filing of a petition under Chapter 3 of the Bankruptcy Code.

New Vice Chairman for Supervision

Effective upon the passage of the Act, an additional Vice Chairman of the Board is to be appointed by the President to oversee and develop policy relating to supervision and regulation of financial firms subject to the Board's oversight.

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