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Establishing credible rules for Fed emergency lending

Establishing credible rules for Fed emergency lending PurposeThe purpose of this paper is to propose reforms that would establish a credible framework of rules to constrain and guide emergency lending by the Federal Reserve and by fiscal authorities during a future financial crisis.Design/methodology/approachThe authors propose a set of five overarching rules, informed by history, empirical evidence and theory, which would serve as the foundation on which detailed legislation should be constructed.FindingsThe authors find that the current framework governing emergency lending – including reforms to Federal Reserve lending enacted after the recent crisis – is inadequate and not credible, and that their proposed framework would constitute a credible balancing of costs and benefits.Practical implicationsAdequate assistance to financial institutions would be provided in systemic crises but would be limited in its form, and by the process that would govern its provision.Originality/valueThis framework would serve as a basis for establishing effective rules that would be credible, and that would properly balance the moral-hazard costs of emergency lending against the gains from avoiding systemic collapse of the financial system. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Economic Policy Emerald Publishing

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References (19)

Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1757-6385
DOI
10.1108/JFEP-01-2017-0006
Publisher site
See Article on Publisher Site

Abstract

PurposeThe purpose of this paper is to propose reforms that would establish a credible framework of rules to constrain and guide emergency lending by the Federal Reserve and by fiscal authorities during a future financial crisis.Design/methodology/approachThe authors propose a set of five overarching rules, informed by history, empirical evidence and theory, which would serve as the foundation on which detailed legislation should be constructed.FindingsThe authors find that the current framework governing emergency lending – including reforms to Federal Reserve lending enacted after the recent crisis – is inadequate and not credible, and that their proposed framework would constitute a credible balancing of costs and benefits.Practical implicationsAdequate assistance to financial institutions would be provided in systemic crises but would be limited in its form, and by the process that would govern its provision.Originality/valueThis framework would serve as a basis for establishing effective rules that would be credible, and that would properly balance the moral-hazard costs of emergency lending against the gains from avoiding systemic collapse of the financial system.

Journal

Journal of Financial Economic PolicyEmerald Publishing

Published: Aug 7, 2017

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