At a recent conference sponsored by the Committee on Capital Markets Regulation, Federal Reserve Vice Chairman Stanley Fischer noted how financial crisis inflicted damage on the economy and on the public, the damage would have been far greater had the Fed not deployed its lender-of last-resort powers to deal with the incipient breakdown of the functioning of the U.S. monetary and credit systems.
Stanley noted that largely because of the measures that have been taken by the Fed and other supervisory agencies, the likelihood that lender-of-last-resort loans will be needed has been greatly reduced.
Stanley said, largely as a result of these measures, the common equity capital ratios of the largest U.S. bank holding companies have more than doubled since the crisis. In addition, banking organizations are, for the first time, subject to a numerical liquidity requirement. The requirement ensures that large banking organizations maintain buffers of high-quality liquid assets sufficient to meet cash outflows during a 30-day episode of systemic and idiosyncratic liquidity stress.
Stanley also noted that although attention following the passage of Dodd-Frank Act has focused on the limitations it places on lender-of-last-resort lending, if necessary and appropriate, the Federal Reserve has the authority to act as lender of last resort in several ways. Most importantly, the Fed retains the power to extend discount window loans to insured depository institutions – including commercial banks, thrift institutions, credit unions, or U.S. branches and agencies of foreign banks. Such loans can be to individual institutions facing funding pressures, or they can be to banks more generally to address broader financial stresses.