September 15, 2008
Who Can Access the Fed's Discount Window?
Posted by David Zaring

AIG wants access to the Federal Reserve's so-called discount window, investment banks already get it, the Fed is planning to expand it dramatically, and other companies, like the automakers, are wondering whether they can also benefit from taxpayer largesse.  Who can access the Fed's discount window? 

The short, but surprising, answer is that any of these institutions could access that window if the Fed wished to permit it.  Congress created the discount window with 1932 amendments to the Federal Reserve Act, and those Great Depression agencies (the SEC is another one of them, so is the FCC and NLRB) were given very broad statutory mandates.  Section 13(3) of the act provides

In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, by the affirmative vote of not less than five members, may authorize any Federal reserve bank, during such periods as the said board may determine, at rates established in accordance with the provisions of section 14, subdivision (d), of this Act, to discount for any individual, partnership, or corporation, notes, drafts, and bills of exchange when such notes, drafts, and bills of exchange are indorsed or otherwise secured to the satisfaction of the Federal Reserve bank: Provided, That before discounting any such note, draft, or bill of exchange for an individual, partnership, or corporation the Federal reserve bank shall obtain evidence that such individual, partnership, or corporation is unable to secure adequate credit accommodations from other banking institutions. All such discounts for individuals, partnerships, or corporations shall be subject to such limitations, restrictions, and regulations as the Board of Governors of the Federal Reserve System may prescribe.

Section 14(d), referenced above, simply authorizes the Fed to set these rates, which "shall be fixed with a view of accommodating commerce and business."

It is, like I said, a lot of power, and it was invoked by the Fed when it extended the discount window to investment banks (which the Fed doesn't regulate) in the wake of the disappearance of Bear Stearns.  Here's what the Fed said in the minutes it released on that decision:

[in deciding whether to offer] an extension of credit to any individual, partnership, or corporation under section 13(3) of the Federal Reserve Act, all available Board members then in office unanimously determined, in connection with the authorization of the extension of credit, that (1) unusual and exigent circumstances existed; (2) Bear Stearns, and possibly other primary securities dealers, were unable to secure adequate credit accommodations elsewhere; (3) this action was necessary to prevent, correct, or mitigate serious harm to the economy or financial stability; ... and (6) any credit extended will be payable on demand.

(Also discussed here.)  So upon a finding of unusual and exigent circumstances, the Fed can lend at bargain rates to just about anyone - and take pretty worthless collateral in exchange for its government-guaranteed money.

No big conclusion here, we're just being descriptive.  But the next time someone tells you that bureaucrats inevitably expand their powers to the outer limits of their statutory authority, ask them the last time the Fed got involved in a personal bankruptcy.  Or ask them about Lehman.

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