10.4 Comparison of LLR Powers of the Four Central Banks
10.4.9 Using Discount Window Proceeds to Lend to Affiliates
Finally, the United States is the only country that prohibits banks from using discount window loans to support their affiliates (e.g., broker-dealers). This requirement forces such affiliates to seek Fed funding independently as nonbanks, with the added conditions of nonbank funding. Even the UK “Vickers report” does not prohibit a bank from
funneling central bank liquidity to a nonbank affiliate.197
In summary, the Fed is by far the weakest lender of last resort relative to its foreign counterparts and the Fed’s lender-of-last-resort powers are under political attack in the United States from both sides of the political spectrum. Even President Jeff Lacker of the Richmond Federal Reserve considers LLR as being part of the government safety net that is contributing to moral hazard, and argues for a weakening of such powers.198 While all four central banks reviewed above impose strict institutional constraints on lender-of- last-resort authority, the political unpopularity of this traditional function is heaviest in the United States. Just look at the ECB, which is not supposed to loan to insolvent banks, in principle, yet has lent amply to Greek banks. This is not only due to the ECB’s
structural “constitutional” independence but also due to the fact that the general concept of lender-of-last-resort authority does not face the level of hostility in Europe that it does in the United States.
Apart from the political environment, institutionally the United States grants by far the weakest lender-of-last-resort powers to its central bank, particularly with respect to
nonbanks: (1) its independence is more fragile; (2) it is the only country with special limitations on lending to nonbanks as compared with banks; (3) it is the only country, outside the eurozone, that makes no provision for loans to institutions the central bank does not judge as solvent (and as noted the eurozone requirement could be toothless); (4) while the BOE and BOJ require Treasury approval or direction for emergency lending, such requirements are likely to be much less politicized than the US Treasury approval of loans to nonbanks; (5) it is the only country that places restrictions on banks using
discount window loans to support affiliates; (6) it is the only country requiring that there be a broad program for borrowing by nonbanks; and (7) it is the most aggressive country in requiring disclosure, thereby possibly inhibiting borrowers from borrowing due to the associated stigma. All but the first point results from changes by Dodd–Frank.
This US weakness is not likely to be rectified in the near future given the politics surrounding bailouts. Indeed, as the FORM Act demonstrates, the situation could get worse not better.
Notes
1. This chapter is based on my article, The Federal Reserve: The weakest lender of last resort among its peers, International Finance 18 (3): 321–42 (2015).
2. Bank of England, Bank of England Legislation (2015), available at
http://www.bankofengland.co.uk/about/Pages/legislation/default.aspx. Subsequent legislation includes the Bank Charter Act 1844, the Bank of England Act 1946, the Charter of the Bank of England 1998, the Bank of England Act (“1998 Act”), the Banking Act of 2009, and the Financial Services Act 2012.
3. Speech, Mark Carney, Governor of the Bank of England, One Mission. One Bank.
Promoting the good of the people of the United Kingdom 1, 3 (Mar. 18, 2014), available at
http://www.bankofengland.co.uk/publications/Documents/speeches/2014/speech715.pdf 4. Bank of England, Bank of England Legislation (2015), available at
http://www.bankofengland.co.uk/about/Pages/legislation/default.aspx.
5. Speech, Mark Carney, Governor of the Bank of England, One Mission. One Bank.
Promoting the good of the people of the United Kingdom 1, 3 (Mar. 18, 2014), available at
http://www.bankofengland.co.uk/publications/Documents/speeches/2014/speech715.pdf 6. Id.; see also Bank of England, Bank of England: Monetary Policy Framework, available
at
http://www.bankofengland.co.uk/monetarypolicy/Pages/framework/framework.aspx.
The 1998 Act provides that the government may give instruction to the Bank in extreme circumstances if the national interest demands it.
7. Id.
8. Ian Plenderleith, Review of the Bank of England’s Provision of Emergency Liquidity Assistance in 2008–09 1, 22, available at
http://www.bankofengland.co.uk/publications/Documents/news/2012/cr1plenderleith.pdf 9. Bank of England, One Mission (2015), available at
http://www.bankofengland.co.uk/about/Pages/onemission/default.aspx.
10. Id.
11. Speech, Minouche Shafik, Deputy Governor of the Bank of England, Fixing the Global Financial Safety Net: Lessons from Central Banking (Sept. 22, 2015).
12. Bank of England, Bank of England Sterling Monetary Framework, available at
http://www.bankofengland.co.uk/markets/pages/money/default.aspx; Bill Winters, Review of the Bank of England’s Framework for Providing Liquidity to the Banking System 1, 5 (Oct. 2012), available at
http://www.bankofengland.co.uk/publications/Documents/news/2012/cr2winters.pdf 13. Id.
14. Id. at 18 (quoting “The Development of the Bank of England’s Market Operations”).
15. Id. at 5–6.
16. Bank of England, The Bank of England’s Sterling Monetary Framework 1 (Nov. 2014), available at
http://www.bankofengland.co.uk/markets/Documents/money/publications/redbook.pdf 17. Id. at 6.
18. Id. at 6, 13; Bank of England, Contingent Term Repo Facility (2015), available at http://www.bankofengland.co.uk/markets/Pages/money/ctrf/default.aspx.
19. See Bank of England, The Bank of England’s Sterling Monetary Framework 1, 7 (Nov.
2014), available at
http://www.bankofengland.co.uk/markets/Documents/money/publications/redbook.pdf Bank of England, SMF Application Form—for applicants wishing to become
participants in the Bank of England’s Sterling Monetary Framework facilities 1 (Nov.
2014), available at.
http://www.bankofengland.co.uk/markets/Documents/money/documentation/smfapplicationform.pdf 20. See Bank of England, Banks and Building Societies Lists (2015), available at
http://www.bankofengland.co.uk/pra/Pages/authorisations/banksbuildingsocietieslist.aspx 21. Bank of England, Terms and Conditions for Participation in the Bank of England’s
Operations under the Sterling Monetary Framework 1 (Nov. 5, 2014), available at
http://www.bankofengland.co.uk/markets/Documents/money/documentation/smfterms.pdf 22. Bank of England, Widening access to the Sterling Monetary Framework (2014),
available at
http://www.bankofengland.co.uk/publications/Pages/news/2014/144.aspx. Tobias Adrian, Christopher R. Burke, and James J. McAndrews, The Federal Reserve’s
Primary Dealer Credit Facility, Fed. Res. Bank of New York Curr. Issues Econ. Fin. 15, 4 (Aug. 2009), available at http://newyorkfed.org/research/current_issues/ci15-4.pdf 23. See, for example, Bank of England, The Bank of England’s Sterling Monetary
Framework: SMF operating procedures 2.1 (Nov. 2014), available at
http://www.bankofengland.co.uk/markets/Documents/money/documentation/smfopprocs.pdf Bank of England, The Bank of England’s Sterling Monetary Framework 1, 7 (Nov.
2014), available at
http://www.bankofengland.co.uk/markets/Documents/money/publications/redbook.pdf 24. Id. at 13.
25. See Bank of England, The Bank of England’s Sterling Monetary Framework: SMF operating procedures 2.1 (Nov. 2014).
26. Speech, Mark Carney, remarks given at the Lord Mayor’s Banquet for Bankers and Merchants of the City of London 1, 10 (Jun. 12, 2014), available at
http://www.bankofengland.co.uk/publications/Documents/speeches/2014/speech736.pdf 27. Bank of England, The Bank of England’s Sterling Monetary Framework 1, 6 (Nov.
2014), available at
http://www.bankofengland.co.uk/markets/Documents/money/publications/redbook.pdf 28. Id. at 6–7.
29. Speech, Mark Carney, Remarks at the 125th Anniversary of the Financial Times. Full text of Mark Carney’s speech (Oct. 25, 2013) available at
http://www.ft.com/intl/cms/s/0/17a07314-3d44-11e3-b754- 00144feab7de.html#axzz3TNhX5iz2.
30. Bank of England, The Bank of England’s Sterling Monetary Framework 1, 7, 12 (Nov.
2014), available at
http://www.bankofengland.co.uk/markets/Documents/money/publications/redbook.pdf 31. Id. at 7, 12.
32. Id. at 7, 12.
33. Bank of England, The Bank of England’s Sterling Monetary Framework 1, 7–8 (Nov.
2014), available at
http://www.bankofengland.co.uk/markets/Documents/money/publications/redbook.pdf see also Bank of England, Sterling Monetary Framework: Summary of haircuts for
securities eligible for the Bank’s lending operations (Nov. 2014), available at
http://www.bankofengland.co.uk/markets/Documents/money/publications/summary_haircuts.pdf 34. See Bank of England, Sterling Monetary Framework: Eligible collateral 2015),
available at
http://www.bankofengland.co.uk/markets/Pages/money/eligiblecollateral.aspx; Bank of England, Sterling Monetary Framework: Summary of haircuts for securities eligible for the Bank’s lending operations (Nov. 2014), available at
http://www.bankofengland.co.uk/markets/Documents/money/publications/summary_haircuts.pdf Bank of England, Bank of England Discount Window Facility—Indicative pricing
spreadsheet (2015), available at
www.bankofengland.co.uk/markets/Documents/dwfspreadsheet.xlsx.
35. Tim Wallace, Bank of England plans to accept equities as collateral from banks,
Telegraph (July 13, 2015), available at: http://www.telegraph.co.uk/finance/bank-of- england/11736422/Bank-of-England-to-accept-equities-as-collateral-from-banks.html.
36. Bank of England, The Bank of England’s Sterling Monetary Framework 1, 12 (Nov.
2014), available at
http://www.bankofengland.co.uk/markets/Documents/money/publications/redbook.pdf 37. Id.
38. Bank of England, The Bank of England’s Sterling Monetary Framework: SMF operating procedures 6.23–6.25 (Nov. 2014), available at
http://www.bankofengland.co.uk/markets/Documents/money/documentation/smfopprocs.pdf 39. Bank of England, DWF Transaction Notice (Oct. 13, 2014), available at
http://www.bankofengland.co.uk/markets/Documents/money/discount/dwftrannotice.pdf 40. Paul Fisher, Liquidity support from the Bank of England: The Discount Window
Facility, Speech at National Asset-Liability Management Global Conference, London, Mar. 29, 2012, available at
http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech561.pdf 41. Id.
42. Id. This determination is made at the discretion of the Bank. See also Bank of England, The Bank of England’s Sterling Monetary Framework: SMF operating procedures 6.8 (Nov. 2014), available at
http://www.bankofengland.co.uk/markets/Documents/money/documentation/smfopprocs.pdf 43. Bank of England, The Bank of England’s Sterling Monetary Framework: SMF
operating procedures 6.9–6.12 (Nov. 2014), available at
http://www.bankofengland.co.uk/markets/Documents/money/documentation/smfopprocs.pdf 44. The Bank of England’s Sterling Monetary Framework 1, 13 (Nov. 2014), available at
http://www.bankofengland.co.uk/markets/Documents/money/publications/redbook.pdf Bank of England, The Bank of England’s Sterling Monetary Framework: SMF operating procedures 6.14 (Nov. 2014), available at
http://www.bankofengland.co.uk/markets/Documents/money/documentation/smfopprocs.pdf 45. Bank of England, The Bank of England’s Sterling Monetary Framework: SMF
operating procedures 6.14 (Nov. 2014), available at
http://www.bankofengland.co.uk/markets/Documents/money/documentation/smfopprocs.pdf 46. The Bank of England’s Sterling Monetary Framework 1, 12 (Nov. 2014), available at
http://www.bankofengland.co.uk/markets/Documents/money/publications/redbook.pdf 47. See, for example, Thomas M. Humphrey, The lender of last resort: The concept in
history at 8, Fed. Res. Bank of Richmond Econ. Rev., Mar./Apr. 1989.
48. Speech, Mark Carney, Remarks at the 125th Anniversary of the Financial Times, Full text of Mark Carney’s speech (Oct. 25, 2013), available at
http://www.ft.com/intl/cms/s/0/17a07314-3d44-11e3-b754- 00144feab7de.html#axzz3TNhX5iz2.
49. The Bank of England’s Sterling Monetary Framework 1, 13 (Nov. 2014), available at
http://www.bankofengland.co.uk/markets/Documents/money/publications/redbook.pdf 50. Id.
51. Ian Plenderleith, Review of the Bank of England’s Provision of Emergency Liquidity Assistance in 2008–09 1, 91, available at
http://www.bankofengland.co.uk/publications/Documents/news/2012/cr1plenderleith.pdf see also Bank of England, Bank of England Market Notice, Indexed long-term repo
operations and Contingent Term Repo Facility 1, (Jan. 16, 2014), available at
http://www.bankofengland.co.uk/markets/Documents/marketnotice140116.pdf. The Contingent Term Repo Facility was formerly called the Extended Collateral Term Repo (ECTR) Facility.
52. The Bank of England’s Sterling Monetary Framework 1, 13 (Nov. 2014), available at
http://www.bankofengland.co.uk/markets/Documents/money/publications/redbook.pdf 53. Id. at 11, 13.
54. Id. at 13.
55. Bank of England, The Bank of England’s Sterling Monetary Framework: SMF operating procedures 5.23–5.25 (Nov. 2014), available at
http://www.bankofengland.co.uk/markets/Documents/money/documentation/smfopprocs.pdf 56. The Bank of England’s Sterling Monetary Framework 1, 13 (Nov. 2014), available at
http://www.bankofengland.co.uk/markets/Documents/money/publications/redbook.pdf 57. Bank of England, Contingent Term Repo Facility—Results (2015), available at
http://www.bankofengland.co.uk/markets/Pages/money/ctrf/results.aspx.
58. Financial Services Act of 2012, 2012 c. 21, Part 4, available at
http://www.legislation.gov.uk/ukpga/2012/21/part/4/enacted; HM Treasury, Bank of England, and Prudential Regulation Authority, Memorandum of understanding on financial crisis management §1 (2012), available at
http://www.bankofengland.co.uk/about/Pages/mous/default.aspx.
59. See, generally, Review of the Bank of England’s provision of emergency liquidity assistance in 2008–09, Report by Ian Plenderleith (Oct. 2012), at 51 available at
http://www.bankofengland.co.uk/publications/Documents/news/2012/cr1plenderleith.pdf
“The purpose of this review is to learn lessons to inform the way the Bank conducts ELA operations for individual financial institutions. Such support operations will, in
due course, be conducted under the new Crisis Management Memorandum of Understanding, which was published in January 2012. The review will build on the lessons learned in relation to the ELA provided to Northern Rock in 2007, as set out in the Treasury Committee’s report “The Run on the Rock.”” Bank of England News
Release: Court of the Bank of England commissions a set of reviews to learn lessons (May 21, 2012), available at:
http://www.bankofengland.co.uk/publications/Pages/news/2012/049.aspx 60. Bank of England, The Bank Return (2015), available at
http://www.bankofengland.co.uk/publications/Pages/bankreturn/default.aspx.
61. Bank of England, Changes to the Bank’s weekly reporting regime 1 (Jun. 30, 2014), available at
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb300614.pdf 62. Id.
63. Id.; Banking Act of 2009 §245, available at
http://www.legislation.gov.uk/ukpga/2009/1/pdfs/ukpga_20090001_en.pdf.
64. Bank of England, Weekly Report (2015), available at
http://www.bankofengland.co.uk/publications/Pages/weeklyreport/default.aspx.
65. Bank of England, Changes to the Bank’s weekly reporting regime 1, 2 (Jun. 30, 2014), available at
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb300614.pdf 66. Id.
67. HM Treasury, Bank of England, and Prudential Regulation Authority, Memorandum of understanding on financial crisis management §5 (2012), available at
http://www.bankofengland.co.uk/about/Pages/mous/default.aspx.
68. Id. at §12.
69. Ian Plenderleith, Review of the Bank of England’s provision of emergency liquidity assistance in 2008–09 1, 91, available at
http://www.bankofengland.co.uk/publications/Documents/news/2012/cr1plenderleith.pdf 70. Id. at 10, 57, 81.
71. See, generally, Kenneth N. Kuttner, The Federal Reserve as lender of last resort during the Panic of 2008 (Dec. 30, 2008).
72. See id.
73. HM Treasury, Bank of England, and Prudential Regulation Authority, Memorandum of understanding on Ffinancial crisis management §25 (2012), available at
http://www.bankofengland.co.uk/about/Pages/mous/default.aspx.
74. Id.
75. Financial Services Act of 2012, 2012 c. 21, Part 4 §58, 62, available at
http://www.legislation.gov.uk/ukpga/2012/21/part/4/enacted; HM Treasury, Bank of England, and Prudential Regulation Authority, Memorandum of understanding on financial crisis management §4 (2012), available at
http://www.bankofengland.co.uk/about/Pages/mous/default.aspx.
76. HM Treasury, Bank of England, and Prudential Regulation Authority, Memorandum of understanding on financial crisis management §26 (2012), available at
http://www.bankofengland.co.uk/about/Pages/mous/default.aspx.
77. Id.
78. Id. at §26, 30.
79. Id. at §32.
80. Id.
81. Id.
82. See Hanspeter Scheller, The European Central Bank, History, role and functions 1, 28–29 (2004), available at
https://www.ecb.europa.eu/pub/pdf/other/ecbhistoryrolefunctions2004en.pdf.
83. European Union, European Central Bank (2015), available at http://europa.eu/about- eu/institutions-bodies/ecb/index_en.htm; European Union, Protocol on the Statute of the European System of Central Banks and of the European Central Bank, Article 2, available at https://www.ecb.europa.eu/ecb/legal/pdf/en_statute_2.pdf.
84. Id.
85. The ECB makes its mind up: The launch of euro-style QE, The Economist (Jan. 22, 2015), available at http://www.economist.com/blogs/freeexchange/2015/01/ecb- makes-its-mind-up; European Union, Protocol on the Statute of the European System of Central Banks and of the European Central Bank, Article 1, available at
https://www.ecb.europa.eu/ecb/legal/pdf/en_statute_2.pdf.
86. European Central Bank, Tasks (2015), available at
https://www.ecb.europa.eu/ecb/tasks/html/index.en.html.
87. Id.
88. European Central Bank, Annual Report 1999 (Mar. 2000) 1, 98, available at https://www.ecb.europa.eu/pub/pdf/annrep/ar1999en.pdf.
89. European Union, Protocol on the Statute of the European System of Central Banks and of the European Central Bank, Article 14.4, available at
https://www.ecb.europa.eu/ecb/legal/pdf/en_statute_2.pdf; see also Rosa Lastra, International financial and monetary law 1, 337 (2015); Jeremie Cohen-Setton, ECB liquidity and the return of National Central Banks (Apr. 8, 2011), available at
http://www.bruegel.org/nc/blog/detail/article/569-ecb-liquidity-and-the-return-of- national-central-banks/.
90. European Central Bank, ELA procedures (the procedures underlying the Governing Council’s role pursuant to Article 14.4 of the Statute of the European System of Central Banks and of the European Central Bank with regard to the provision of ELA to
individual credit institutions), available at
http://www.ecb.europa.eu/pub/pdf/other/201402_elaprocedures.en.pdf
91. European Central Bank, Emergency liquidity assistance (ELA) and monetary policy (2015), available at https://www.ecb.europa.eu/mopo/ela/html/index.en.html; The Economist explains what emergency liquidity assistance means, The Economist (Feb.
8, 2015), available at http://www.economist.com/blogs/economist-
explains/2015/02/economist-explains-5; European Central Bank, Introduction, The eurosystem’s instruments (2015), available at
https://www.ecb.europa.eu/mopo/implement/intro/html/index.en.html.
92. See European Central Bank, Collateral (2015), available at https://www.ecb.europa.eu/mopo/assets/html/index.en.html.
93. European Central Bank, Guideline of the European Central Bank of 20 September 2011 on monetary policy instruments and procedures of the eurosystem, Section 1.5, Official J. European Union (2011), available at
https://www.ecb.europa.eu/ecb/legal/pdf/l_33120111214en000100951.pdf; European Central Bank, Guideline (EU) 2015/XX* of the European Central Bank of 19 December 2014 on the implementation of the eurosystem monetary policy framework (recast) (ECB/2014/60) 1(20), Article 2(72) (2014), available at
https://www.ecb.europa.eu/ecb/legal/pdf/en_ecb_2014_60_f_sign.pdf.
94. Id.
95. Id. at Part 1, Article 2(59) and (70); see also Press Release, ECB announces a new Guideline on the implementation of monetary policy (Feb. 20, 2015), available at http://www.ecb.europa.eu/press/pr/date/2015/html/pr150220.en.html.
96. European Central Bank, Guideline (EU) 2015/XX* Article 55(a) (2015), available at https://www.ecb.europa.eu/ecb/legal/pdf/en_ecb_2015_11_signed__f.pdf.
97. Austrian Federal Ministry of Finance, Basel III changes in the regulatory framework (2015), available at https://english.bmf.gv.at/financial-sector/basel-III.html.
98. See Silvia Merler, Preserving the Greek Financial Sector: Options for Recap and Assistance, Bruegel (Jul. 12, 2015), http://bruegel.org/2015/07/preserving-the-greek- financial-sector-options-for-recap-and-assistance/; Raoul Ruparel, ECB Asks: Are Greek Banks Insolvent? Forbes (Feb. 20, 2015),
http://www.forbes.com/sites/raoulruparel/2015/02/20/are-greek-banks-insolvent/.
99. See European Commission, CRD IV/CRR – Frequently Asked Questions (Mar. 21, 2013), http://europa.eu/rapid/press-release_MEMO-13-272_en.htm; Merler, supra note 1.
100. The Economist explains what emergency liquidity assistance means, The Economist (Feb. 8, 2015), available at http://www.economist.com/blogs/economist-
explains/2015/02/economist-explains-5.
101. European Central Bank, The EU arrangements for financial crisis management, ECB Monthly Bulletin 1, 80 (Feb. 2007), available at
https://www.ecb.europa.eu/pub/pdf/mobu/mb200702en.pdf.
102. European Central Bank, The Financial Risk Management of the Eurosystem’s Monetary Policy Operations 1, 35 (Jul. 2015),
https://www.ecb.europa.eu/pub/pdf/other/financial_risk_management_of_eurosystem_monetary_policy_operations_201507.en.pdf 103. European Central Bank, The EU arrangements for financial crisis management, ECB
Monthly Bulletin 1, 81 (Feb. 2007), available at
https://www.ecb.europa.eu/pub/pdf/mobu/mb200702en.pdf.
104. Jeff Black, ELA Funds to euro-area banks probably jumped, ECB data show, Bloomberg (May 29, 2012); see also ELA Procedures, see supra note 820.
105. European Central Bank, Emergency liquidity assistance (ELA) and monetary policy 1 (2015), available at https://www.ecb.europa.eu/pub/pdf/other/elaprocedures.en.pdf.
106. Claire Jones, Q&A: The ECB’s warning shot to Greece, Financial Times (Feb. 5, 2015), available at http://www.ft.com/intl/cms/s/2/197a2706-ac93-11e4-beeb-
00144feab7de.html#axzz3UYsL1nOk. As Tyler Durden (played by Brad Pitt) explains in the 1999 film, “The first rule of Fight Club is: you do not talk about Fight Club. The second rule of Fight Club is: you do not talk about Fight Club.”
107. European Central Bank, Emergency liquidity assistance (ELA) and monetary policy (2015), available at https://www.ecb.europa.eu/mopo/ela/html/index.en.html.
108. Dara Doyle and Jeff Black, Frozen Europe means ECB must resort to ELA for banks, Bloomberg (May 24, 2012).
109. Id.; see Paul Carrel and Eva Kuehnen, ECB extends Cyprus emergency funding until Monday, Reuters (Mar. 21, 2013).
110. See, for example, Charles Goodhart and Dirk Schoenmaker, The ECB as lender of last