The Federal Reserve as Last Resort

id=1603323. 327. INT'L MONETARY FUND, supra note 59, at 75. 328. Seeking U.S. Treasury approval could risk Federal Reserve independence, so this Article does not advocate that Congress make this a requirement. 329. "Consultation" rather than "approval" as in the case of the Federal Reserve's 13(3) is arguably the preferable course. [VOL. 46:1 The Federal Reserve As Last Resort this authority, to follow prescribed collateral valuation policies, to ensure that all Title VUII borrowers are solvent, or to make specific reports to Congress about its use. Congress should require all four, especially because Title VIII's last resort lending authority could potentially be used even more expansively than the Federal Reserve's 13(3) emergency authority. Congress should enact collateral, solvency, accountability, and transparency requirements for Title VIII's lending authority that appropriately parallel those that now govern the Federal Reserve's 13(3) emergency authority. Congress should also require that the Federal Reserve develop policies and procedures for its use. The purpose of the discount window is to provide temporary, last-resort liquidity to certain solvent but illiquid financial institutions. Historically, however, insolvent financial institutions have sometimes received assistance, even for prolonged periods of time.330 Therefore, there is a risk that a distressed CCP could similarly receive discount window funding for a sustained period of time. This risk is likely heightened in the case of a systemically significant financial market utility as substantially greater risk and uncertainty could be expected to surround the potential insolvency of a distressed CCP. Although an insolvent, systemically significant financial market utility should theoretically be resolved under Dodd-Frank's new orderly liquidation authority, the use of this authority is ultimately left to regulatory discretion.3 31 Given the likely complexity of resolving an insolvent, systemically significant financial institution such as a CCP, regulators could have strong incentives to forbear 32 from resolution. 3 3 In order to counteract the tension potentially presented by countervailing regulator interests, Congress should require appropriate accountability, collateral valuation, solvency, and disclosure requirements in the use of Title VIII's last resort lending authority. These accountability and disclosure requirements should, at a minimum, include policies and procedures for the use of Title VIII's last resort lending authority. Such policies and procedures should be designed to guard against assistance to insolvent designated financial market utilities (though such distinctions will be difficult, if possible at all), to disclose details of the collateralization of discount window funding, to require that collateral accepted to secure 330. See generally Schwartz, supra note 102, at 59. 331. See Title VII of Dodd-Frank. 332. See generally Richard Scott Carnell, A Partial Antidote to Perverse Incentives: The FDIC Improvement Act of 1991, 12 ANN. REv. BANKING L. 317, 317-18 (1993), 333. See generally Allen, supra note 322, at 1099. FALL 20121 University of Michigan Journal of Law Reform discount window funds be assigned a value, and to require timely reports to Congress while such last resort lending is outstanding. The congressional reporting requirement should be at least as comprehensive as that mandated for the Federal Reserve's 13(3) emergency authority.334 This Article recommends more timely reporting requirements. For example, within seventy-two hours, initial disclosures should be made to the appropriate congressional committees. 335 Disclosure within one year should be made to the general public instead of the currently mandated two-year timelag.-3 6 Such mandates should not be problematic for temporary, emergency uses of Title VIII's last-resort lending authority. Timely public disclosure will act as an important countervailing pressure to any potential financial industry pressures. 37 Of utmost importance is that collateral disclosure and valuation requirements similar to those mandated by Dodd-Frank in the use of the Federal Reserve's 13(3) emergency power also be mandated for Title VIII's last-resort lending authority. Currently, the only collateral restriction on Title VIII's credit and liquidity authority is that the Federal Reserve must deem such collateral acceptable, 3 8 as in the case of the Federal Reserve's 13(3) emergency power preDodd-Frank. Therefore, the Federal Reserve should disclose details and comprehensive valuations of the collateral accepted to secure Tide VIII lending within both its reports to Congress and to the public. This requirement is critical because the Federal Reserve's collateral acceptance policy is at the heart of its new role as marketmaker of last resort. Shortages of high-quality collateral can exist.339 Regulatory initiatives focused on central clearing have put even more stress on this supply, resulting in shortages . 40 Consequently, 334. See 12 U.S.C.A. 343(C) (West 2012). 335. These committees are the Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives. 336. Any use of Title VIII's discount window lending authority must be disclosed within two years. See 12 U.S.C.A. § 248(s)(2)(B) (West 2012). 337. Professor Rajan explains that, from a general perspective, "[ilf the gathered information [regarding specific financial risks] were made public... it could offer a measure of public oversight over supervision .... Public exposure can reduce tail risk taking in its early stages, for tail risk is of significant value to management at that stage only if the public is unaware of the extent of the company's exposure to risk." RAJAN, supra note 296, at. 166-67. CCPs are primarily designed to manage tail risk. Therefore, appropriately designed public disclosure mandates are a particularly important risk management measure. 338. See 12 U.S.C.A. § 343 (West 2012) 339. See generally Telis Demos, CME to Accept Corporate Bonds as Collateral, FIN. TIMES, Feb. 9, 2012, http://www.ft.com/int/cms/s/0/2e21b2e6-533b-llel-950d-OO144feabdcO.html#