Lending in a Crisis: Reviewing the Federal Reserves Emergency Lending Powers... (EventID=114066)

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Connect with the House Financial Services Committee Get the latest news: https://financialservices.house.gov/ Follow us on Facebook: https://www.facebook.com/HouseFinancialCmte Follow us on Twitter: https://twitter.com/FSCDems ___________________________________ On Thursday, September 21, 2021, at 10:00 a.m. (ET) National Security, International Development, and Monetary Policy Subcommittee Chairman Himes and Ranking Member Barr will host a hybrid hearing entitled, “Lending in a Crisis: Reviewing the Federal Reserve’s Emergency Lending Powers During the Pandemic and Examining Proposals to Address Future Economic Crises." - - - - - - - - Witnesses for this one-panel hearing will be: • The Honorable Shawn Wooden, Treasurer, State of Connecticut • Mike Konczal, Director, Macroeconomic Analysis and Progressive Thought, Roosevelt Institute • June Rhee, Director Master of Management Studies in Systemic Risk, Yale School of Management • Christopher Russo, Post-Graduate Research Fellow, Mercatus Center • Claudia Sahm, Senior Fellow, Jain Family Institute Background The COVID-19 pandemic triggered an unprecedented economic downturn in the United States. In February 2020, signs began to emerge that the COVID-19 virus would have severe public health consequences around the world, leading to significant turmoil in financial markets, and raising concerns about an imminent financial crisis that would necessitate emergency action by the Board of Governors of the Federal Reserve System (Fed) in its capacity as the “lender of last resort.” The Fed acted quickly to cut its primary interest rate and re-establish bond purchasing programs set up during the Great Recession. In mid-March 2020, Fed Chair Jerome Powell directed staff to begin exploring what emergency lending programs could be developed to stabilize financial markets. Recognizing the danger of severe long-term damage to the economy, the Fed announced the formation of several lending efforts to provide credit to a wide selection of borrowers in both the private and public sectors. On March 23, 2020, the Fed announced the Primary Market Corporate Credit Facility (PMCCF), which was intended to purchase new bonds from eligible corporations, and the Secondary Market Corporate Credit Facility (SMCCF), which was intended to be a liquidity backstop in the secondary corporate bond market.3 Through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Congress provided $454 billion in funds to the Treasury Department to set up emergency lending facilities that would direct support to small businesses and municipalities. On April 9, 2020, the Fed announced that it would establish additional facilities to provide loans to municipal borrowers and purchase loans made to small and mid-sized businesses by establishing the Municipal Liquidity Facility (MLF) and the Main Street Lending Program (MSLP).4 Of the 13 emergency lending facilities the Fed eventually established to combat the financial fallout caused by COVID-19, nine (including the SMCCF, the MLF, and the MSLP) were supported with CARES Act funds. The CARES Act-funded facilities were all terminated by early January 2021, though several of the other facilities, like the Paycheck Protection Program Liquidity Facility (PPPLF), were closed several months later. Section 13(3) of the Federal Reserve Act The Fed derives its authority to support corporations and other non-member banks of the Federal Reserve System from Section 13(3) of the Federal Reserve Act. Section 13(3) can only be invoked during “unusual and exigent circumstances” by a consenting vote of at least five of seven members of the Federal Reserve Board of Governors. Section 13(3) was last invoked during the 2008 financial crisis, when the Fed took extraordinary action to assist firms whose failure would amplify systemic risks. Concerns were raised that the Fed was inappropriately bailing out individual firms, like Bear Stearns and AIG, while Fed officials said they only did so because there was no legal mechanism at the time to safely unwind a systemic financial firm. In response, Congress passed the Dodd–Frank Wall Street Reform and Consumer Protection Act, which established an orderly liquidation authority for systemic firms, and reformed the Fed’s 13(3) powers in several ways: by requiring that the Treasury Secretary approve all 13(3) actions, by requiring that all emergency lending establish “broad-based eligibility,” and by prohibiting lending to insolvent institutions. Secondary Market Corporate Credit Facility (SMCCF) The SMCCF purchased existing corporate bonds that were trading in the secondary corporate bond market. The Fed aimed to inject liquidity and instill confidence that demand would exist for newly issued corporate debt. The SMCCF originally only purchased bonds issued by companies that were rated investment grade (BBB-, Baa3)... Hearing page: https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=408303