Professor Hal S. Scott and four economic experts – Charles W. Calomiris, Douglas Holtz-Eakin, R. Glenn Hubbard, and Allan H. Meltzer – published an article in the Journal of Financial Economic Policy entitled “Establishing credible rules for Fed emergency lending.”

In the article, the authors discuss how the current framework governing emergency lending is inadequate and not credible and 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.

Specifically, the authors propose a set of five overarching rules:

(1) Require the Federal Reserve to outline in detail its crisis management procedures, including the specific courses of action it would take as part of future lending to banks under § 10 (the discount window) or to nonbanks under § 13(3) so that those plans can be reviewed by Congress and subject to Congressional oversight;

(2) Establish specific, observable criteria that will be used to determine whether emergency lending by the Federal Reserve becomes fiscal policy that should involve the Treasury;

(3) Establish a clearly defined protocol for proceeding in the case that government intervention is deemed fiscal by the Federal Reserve;

(4) Require non-banks that receive funding from the Federal Reserve to submit to Federal Reserve examination and capital requirements going forward for the duration of the period they receive assistant; and

(5) Require that Treasury have access to supervisory information to make fiscal decisions.

The full text of the article is available as a PDF here.