This staff report examines the Federal Reserve’s (the “Fed’s”) role in emergency lending to non-banks in light of its response to the COVID-19 pandemic and proposes a new framework for such lending.


Part I outlines the current framework governing emergency lending to non-banks, with a focus on the restrictions adopted in the Dodd-Frank Act following the global financial crisis. These restrictions include requiring Treasury approval of any Fed lending program or facility for non-banks; requiring that loans be collateralized in a manner that is sufficient to protect taxpayers from losses; and limiting the Fed’s ability to lend to insolvent borrowers.


Part II describes the Federal Reserve’s assumption of a novel role as part of its response to the COVID-19 pandemic: the credit provider, not just liquidity provider, of last resort. Because of restrictions imposed on the Fed by the Dodd-Frank Act, however, the Fed could not assume this role on its own. Instead, it needed the approval of and financial backing from Treasury due to the Dodd-Frank framework.


Part III focuses on issues with the non-bank emergency lending framework that were highlighted by the Fed’s pandemic response role. First, the current framework allows the Fed to operate lending programs that are essentially fiscal programs, which should properly be the responsibility of elected authorities. This was particularly an issue during the pandemic response for Fed lending programs to non-financial companies. Second, the Fed is put in the position of picking winners and losers when determining to whom it will lend. Finally, the lack of transparency regarding the design of the joint Treasury-Fed lending programs makes it difficult to determine who is responsible for success and failure. If the Fed bears the blame for failures that are the responsibility of Treasury, it could threaten the Fed’s independence and its ability to exercise its more traditional functions.


Part IV proposes a revised framework for emergency lending that would address the concerns raised in Part III. Under this framework, for all emergency loans to non-banks, the Treasury must first determine whether such lending poses significant credit risk—meaning that borrowers have a substantial likelihood of being unable to repay the loans. Lending that poses significant credit risk should be viewed as implicating fiscal policy and thus outside the Fed’s purview. In our view, lending to non-financial companies, such as lending programs to main street businesses, always involves significant credit risk and thus should be the sole purview of the Treasury. The Treasury should have sole responsibility for the structure and terms of emergency lending facilities that pose significant credit risk. And these programs should be identified as Treasury and not Fed programs. However, the Fed would still have an important role to play in advising Treasury on economic conditions and serve to operate the programs as an agent of Treasury.


If the Treasury determines that the lending facilities to non-banks would not pose significant credit risk, then the Fed would have sole responsibility for the structure and terms of emergency lending facilities that would be identified as Fed programs. Part IV also considers whether the revised framework should be extended, in whole or in part, to the Fed’s emergency lending authority for banks and concludes that there is no compelling reason to alter the longstanding framework for emergency bank lending.


The full report is available here.