On November 30, 2015, the US Federal Reserve Board approved a final rule detailing its procedures for emergency lending under Section 13(3) of the Federal Reserve Act. The Dodd-Frank Wall Street Reform and Consumer Protection Act limited the Federal Reserve Board's emergency lending authority to programs and facilities with "broad-based eligibility" established with the approval of the US Secretary of Treasury and prohibited lending to entities that are insolvent, among other things. The final rule clarifies the Federal Reserve Board's implementation of these and other statutory requirements. Some of the changes from the proposed rule include additional limitations to the definition of "broad-based" to support the revisions made by the Dodd-Frank Act that a program should not be for the purpose of aiding specific companies to avoid bankruptcy or resolution. The final rule also broadens the definition of insolvency to cover situations where a company has not yet entered formal bankruptcy or resolution proceedings, but may be insolvent from an accounting or other perspective. Under the final rule, all lending programs under Section 13(3) must be approved by the Secretary of the Treasury, though the Federal Reserve Board must still find that "unusual and exigent circumstances" exist as a pre-condition to authorizing emergency credit programs. The final rule also requires that the interest rate for credit extended under Section 13(3) be set at a level that is a premium to the market rate in normal circumstances, affords liquidity in unusual and exigent circumstances as well as encourages repayment and discourages use of the program as circumstances normalize.
The final rule will take effect January 1, 2016. The Federal Reserve Board press release and the final rule are available at: http://www.federalreserve.gov/newsevents/press/bcreg/20151130a.htm and http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20151130a1.pdf.
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