WASHINGTON, Dec 23 (Reuters) - The U.S. Federal Reserve Board of Governors unveiled a proposal on Monday that would limit the scope of its authority to bail out a large financial company on the brink of collapse through its emergency-lending programs.
The Fed’s proposal would implement a key provision in the 2010 Dodd-Frank Wall Street reform law that sought to prevent future big bailouts after the Fed extended more than $1 trillion in emergency credit during the height of the financial crisis.
Prior to the passage of the Dodd-Frank law, the Fed had broader powers to extend emergency loans to “any individual, partnership or corporation” that met certain conditions.
Dodd-Frank limits this authority to ensure that the Fed’s emergency lending program cannot be used to aid a failing financial company by helping it avert bankruptcy.
Under the proposed rule, the emergency lending system should only be used to help bolster liquidity to the financial system.
Monday’s proposal also requires the U.S. Treasury secretary to sign off before extending emergency loans.
Previously, an institution only needed an affirmative vote of five Federal Reserve Board members in order to tap into an emergency lending program.
The Fed’s plan will be open for public comment until March 7.