Moody's has issued a report dated December 7th 2015 indicating recent moves to narrow the emergency lending authority is credit negative for US banks and US BHCs. This power, in place since 1932, gives the FED emergency lending authority as lender of last resort. Use of the authority was nil from the 1930s until the most recent crisis, when assistance under Section 13(3) of the relevant act was provided for $29 billion for Bear Stearns and $85 billion to AIG for a line of credit.
The changes now include limitations to broad-based financing programs, a prohibition to lending to insolvent companies, and discourages financing s designed to remove assets from a single company. In addition, going forward, such loans must be made at a penalty rate of interest and be limited to one year maturities (though extensions can be granted). Moody's has not changed the actual ratings of any US banks or BHCs on the back of these developments, although they do underscore the reducing levels of government support for these institutions. The rule is part of a broad suite of measures aimed at ending TBTF provisions for a single entity, as reported by the IFR.
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