Dodd-Frank: Title XI - Federal Reserve System Provisions

INTRODUCTION:

 Title XI addresses changes to the Federal Reserve System. First, the Title allows greater supervision of the Federal Reserve’s operations by allowing the Comptroller General of the United States (the “Comptroller”) to audit the Federal Reserve Board (the “Board”), banks and credit facilities. Second, the Title allows the Board to establish a guarantee program for emergency loans.  Finally, the Title makes changes to governance and positions.

Purpose:

As the central bank of the United States, the Federal Reserve System has great influence over the financial markets and economy of the country.  Therefore, Title XI establishes certain provisions to ensure greater supervision of the Federal Reserve Board, as well as their banks and credit facilities.  


PROVISIONS:

Operations of the Federal Reserve

This Title amends the Federal Reserve Act (12 U.S.C. 226) and gives the Board the power to establish policies and procedures for emergency lending. See 12 U.S.C. § 343 (Dodd-Frank Wall Street Reform and Consumer Protection Act § 1101). It states that emergency lending should be done only to provide liquidity when there is enough security for the loan to protect taxpayers and not to aid a failing financial company. See id.

Additionally, Title XI allows the Comptroller to audit the Board, any Federal reserve bank or any Federal Reserve credit facility. See 31 U.S.C. § 714 (Dodd-Frank Act § 1102). These audits should assess the internal controls and operational integrity of the facilities, the ability of security and collateral policies to effectively mitigate risk, whether the facility inappropriately favors certain users over others and the policies regarding third-party contractors. See id. (Dodd-Frank Act § 1102(a)). The Comptroller may also create and store copies of any books, accounts and other records from such facilities. See id. (Dodd-Frank Act § 1102(b)). The Board must provide the public with the results of such audits on the Board’s public website, along with other reports and information that the Board finds reasonably necessary to understand the Board’s operations and accounting. See 12 U.S.C. § 225(b) (Dodd-Frank Act § 1103).

 

Guarantee Program

 This Title allows the Federal Deposit Insurance Corporation (“FDIC”) to create a program to guarantee any obligations of solvent insured depository institutions or solvent depository institution holding companies. See 12 U.S.C. § 5612 (Dodd-Frank Act § 1105). To be eligible for this program, the FDIC and the Boardmust determine that a “liquidity event” exists that would have serious adverse effects on financial stability or economic conditions. See 12 U.S.C. § 5611 (Dodd-Frank Act § 1104). This guarantee program covers projected losses and administrative expenses with fees collected from all participants in the program, as well as from the Secretary of the Treasury, if necessary. See 12 U.S.C. § 5612 (Dodd-Frank Act § 1105(e)).

For borrowers engaging in emergency lending, the Board is required to disclose the borrower’s identity, as well as the amount and terms of the loan. See 12 U.S.C. § 248 (Dodd-Frank § 1103). While this Title does provide for some protection of the personal privacy of individuals who are referenced but not participating in the loan, this Title directs the Inspector General of the Board to conduct a study on the Freedom of Information Act (“FOIA”) exemption impact on the Dodd-Frank Act. See id. (Dodd-Frank Act §1103(b)).

Governance


Title XI makes various governance changes, including an amendment to the selection process and duties for the Federal Reserve bank presidents, and the creation of a new position, the Vice Chairman for Supervision. See 12 U.S.C. § 341, 12 U.S.C. § 242 (Dodd-Frank Act §§ 1107–08).

IMPLEMENTATION:

Title XI also expands the Federal Reserve’s ability to support other financial institutions by guaranteeing obligations, so long as the institutions are solvent.  This allows the Federal Reserve to help support banks in times of economic upheaval, but does not make them responsible for the obligations of a bank that is going to fail.  Finally, Title XI implements certain oversight and governance requirements of the Federal Reserve System.  Because of the wide reach of the Federal Reserve System, it is important that there is transparency and oversight to ensure that the Board is making responsible choices that do not introduce substantial risk into the system.