Congressman Scott Garrett

Representing the 5th District of New Jersey

Reps. Garrett, Capuano Introduce Bill to Limit Fed’s Bailout Authority

Jun 3, 2015
Press Release
Legislation adds transparency to bailout authority under Section 13(3)

WASHINGTON, D.C. – U.S. Representatives Scott Garrett (R-N.J.), Chairman of the House Financial Services Capital Markets and Government Sponsored Enterprises Subcommittee, and Mike Capuano (D-MA), member of the Financial Services Committee, today introduced H.R. 2625, the Bailout Prevention Act of 2015.

During the financial crisis of 2008, the Federal Reserve used broad powers under Section 13(3) of the Federal Reserve Act to provide trillions of dollars in low-cost loans to a handful of financial institutions. While the Dodd-Frank Act included provisions that were intended to restrict some of the Fed’s broad powers under 13(3), the Fed’s proposed rule in 2014 to implement Dodd-Frank failed to make any meaningful changes, creating a need for Congressional action.

“Amidst the financial crisis of 2008, we witnessed the worst kinds of government cronyism when huge financial institutions were bailed out through section 13(3) of the Federal Reserve Act without much prudence or oversight,” said Garrett. “While Dodd-Frank promised to end the cycle of ‘too big to fail,’ all it did was codify this unfair practice into law and put the American taxpayers on the hook for untold billions—or even trillions—of dollars. I’m happy to introduce this bill with Rep. Capuano to implement the systemic changes and Congressional oversight needed to ensure that the notoriously opaque Federal Reserve is held accountable to our constituents.”

“America’s largest financial institutions received unprecedented assistance from the Federal Reserve during the crisis, much of it unknown to the Congress or public at the time,” said Capuano. “While the Dodd-Frank Act brought some reforms, the  perception lingers that some financial institutions are simply Too Big to Fail and could be bailed out again. This perception has consequences favoring the biggest players in the financial system. We may not know today what the next crisis will look like, but we all have a right to know the full extent of measures that may be taken to prevent a crisis. This legislation will help protect taxpayer dollars by increasing oversight of the Federal Reserve’s emergency lending powers and bringing much needed transparency to the process.”

H.R. 2625, the Bailout Prevention Act (BPA) of 2015, would:

  • Prohibit the Fed from lending to borrowers that are insolvent. The BPA would require an institution’s relevant financial regulators to confirm that a borrower is solvent based on the previous four months of financial data, and would deem insolvent any institution that is undergoing a bankruptcy proceeding.
  • Establish a penalty rate for borrowers using a lending facility under 13(3). The BPA would require a “penalty rate” for borrowers under 13(3) of 500 basis points (5%) over comparable treasuries.
  • Establish criteria for lending facilities to be “broad-based.”  The BPA would require that any lending facility under 13(3) have a minimum of five borrowers, eliminating the Fed’s ability to pick and choose whether to lend to individual institutions.
  • Require Congressional approval for facilities that do not meet the “broad-based” criteria.  The BPA allows for expedited procedures in Congress if the Fed believes that loans must be made to less than five institutions due to unusual circumstances.
  • Make reports available to the public in a timely manner.  The BPA would reduce public reporting time to 60 days.  It would also require that GAO audits of the lending facilities are made public within 60 days after they are shut down.

Similar companion legislation was introduced last month by U.S. Senators David Vitter (R-LA) and Elizabeth Warren (D-MA).