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115th Congress } { REPORT
HOUSE OF REPRESENTATIVES
2d Session } { 115-1117
======================================================================
INDEPENDENCE FROM CREDIT POLICY ACT OF 2017
_______
January 2, 2019.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Hensarling, from the Committee on Financial Services,
submitted the following
R E P O R T
together with
MINORITY VIEWS
[To accompany H.R. 4278]
The Committee on Financial Services, to whom was referred
the bill (H.R. 4278) to ensure that the operations of the Board
of Governors of the Federal Reserve System remain independent
from the credit policy of the United States, and for other
purposes, having considered the same, report favorably thereon
with an amendment and recommend that the bill as amended do
pass.
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Independence from Credit Policy Act of
2017''.
SEC. 2. INDEPENDENCE FROM CREDIT POLICY.
(a) Returning to a Monetary Policy Balance Sheet.--
(1) In general.--Not later than 1 year after the date of the
enactment of this Act--
(A) the Board of Governors of the Federal Reserve
System shall transfer to the Department of the Treasury
all covered assets that are neither gold stock,
Treasury currency, nor direct obligations of the United
States, foreign central banks, or the International
Monetary Fund; and
(B) the Secretary of the Treasury shall transfer to
the Federal reserve banks direct obligations of the
United States of equivalent market value to such
covered assets.
(2) Covered assets defined.--In this subsection, the term
``covered assets'' means all assets--
(A) purchased through open-market operations by the
Federal reserve banks; or
(B) acquired through transactions under the following
sections of the Federal Reserve Act (12 U.S.C. 221 et
seq.):
(i) Section 10A before the date of the
enactment of this Act.
(ii) Section 10B.
(iii) Section 13.
(iv) Section 13A.
(v) Section 24.
(b) Open Market Asset Purchases.--Section 14(b) (12 U.S.C. 355) of
the Federal Reserve Act (relating to ``Purchase and sale of obligations
of United States, States, counties, etc.'') is amended to read as
follows:
``(b) To buy and sell in the open market, at home or abroad, under
the direction and regulations of the Federal Open Market Committee,
gold stock, Treasury currency, or direct obligations of the United
States, foreign central banks, or the International Monetary Fund.
Nothing in this subsection shall be construed to limit advances under
section 10B, or discount loans under sections 13, 13A, or 24.''.
(c) Maintaining a Monetary Policy Balance Sheet.--
(1) Assets acquired under emergency lending.--Section 13(3)
of the Federal Reserve Act (12 U.S.C. 343(3)) is amended by
inserting after subparagraph (E) the following new
subparagraph:
``(F) Not later than 1 year after a Federal reserve
bank acquires any assets under this paragraph that are
neither gold nor direct obligations of the United
States, foreign central banks, or the International
Monetary Fund--
``(i) the Board shall transfer such assets of
the Federal reserve bank to the Department of
the Treasury; and
``(ii) the Secretary of the Treasury shall
transfer to the Federal reserve banks direct
obligations of the United States of equivalent
market value to the assets described in clause
(i).''.
(2) Repeal of authority to provide emergency advances to
groups of member banks.--Section 10A of the Federal Reserve Act
(12 U.S.C. 347a) is repealed.
(3) Assets acquired through advances to member banks.--The
second undesignated paragraph of subsection (a) of section 10B
of the Federal Reserve Act (12 U.S.C. 347b(a)) is amended--
(A) by inserting ``not'' before ``secured by mortgage
loans''; and
(B) by striking ``lowest discount rate'' and
inserting ``highest discount rate''.
Purpose and Summary
On November 7, 2017, Representative French Hill introduced
H.R. 4278, the ``Independence from Credit Policy Act of 2017'',
which amends the Federal Reserve Act to provide for the Federal
Reserve and the Department of the Treasury (``Treasury'') to
engage in asset swaps, whereby the Treasury receives assets
from the Federal Reserve that are neither gold nor Treasury
securities, nor direct obligations of foreign central banks, or
the International Monetary Fund, and in return the Federal
Reserve receives Treasury securities of equivalent market
value.
Background and Need for Legislation
The goal of H.R. 4278 is to increase monetary policy
independence and decrease credit market distortions by
maintaining the Federal Reserve's role as a fiscal agent for
our government without exploiting this agency to engage in off-
budget credit policy.
An efficient monetary policy helps goods and services,
which include labor, readily find their most promising
opportunities. To be sure, realizing this ideal is hard, even
under favorable conditions. It becomes harder still when
central banks step beyond their fundamental economic role and
into the political realm of favoring some credit prices over
others (as the Federal Reserve has done, for example, by
purchasing almost $2 trillion of Mortgage Backed Securities
(MBS) during and after the Financial Crisis).\1\
---------------------------------------------------------------------------
\1\As of October 26, 2017, the Federal reserve banks own almost
$1.8 trillion of Federal agency debt securities and Mortgage-backed
securities. Source: https://www.federalreserve.gov/releases/h41/
current/h41.htm.
---------------------------------------------------------------------------
When fiscal policies grow at unsustainable rates,
governments increasingly become prone to breaching the
independence of their monetary authorities. Unfortunately,
instead of fortifying themselves against such political risks,
central banks have also stepped beyond their narrow remit
without government prodding. In either case, the consequences
are debilitating--asset price signals lose their ability to
clearly communicate information about where goods and services
can find their most promising economic opportunities, and are
instead exploited to divert goods and services toward their
most politically convenient uses.
The United States economic recovery has now entered its
ninth year. Despite this persistence, economic opportunities
continue to fall far short of potential. The important question
is why this recovery failed households and businesses that
continue to fall short of their pre-recession promise.
A frequent answer comes from highly regarded but otherwise
diverse economists. They highlight the role of monetary
policies that have morphed into credit policies. For example,
testifying before the House Financial Services Subcommittee on
Monetary Policy and Trade, MIT Professor Simon Johnson called
attention to this debilitating consequence of a politicized
monetary policy:\2\
---------------------------------------------------------------------------
\2\See the MPT Subcommittee hearing entitled ``Unconventional
monetary policy,'' December 7, 2016. Archived webcast available at
https://financialservices.house.gov/calendar/eventsingle.
aspx?EventID=401201.
I would emphasize, though, and I think we're all
agreeing on this that fiscal policy infrastructure is
the responsibility of the fiscal authority, which is
that Congress in the United States, acting through the
executive branch--it is not the responsibility, and
should not become the responsibility of the Federal
---------------------------------------------------------------------------
Reserve.
Bradeis Professor Steven Cecchetti shared the same concern
as a minority witness for a joint hearing with the Financial
Institutions and Monetary Policy and Trade Subcommittee:\3\
---------------------------------------------------------------------------
\3\See the MPT-FI Joint hearing entitled ``Examining the
Relationship Between Prudential Regulation and Monetary Policy at the
Federal Reserve,'' September 12, 2017. Archived webcast available at
https://financialservices.house.gov/calendar/
eventsingle.aspx?EventID=402279.
Many people, including me, are uncomfortable with the
---------------------------------------------------------------------------
fact that the Federal Reserve owns so many mortgages.
In addition, the New York Times' Paul Krugman highlighted
how the Fed's unconventional balance sheet blurs the lines
between monetary and fiscal policies.\4\ And also responding to
such concerns, Federal Reserve Board Chair Janet Yellen
committed the FOMC during her semi-annual testimony before
Congress to reestablish a brighter line between monetary and
credit policy:\5\
---------------------------------------------------------------------------
\4\Paul Krugman, ``Fiscal aspects of quantitative easing,'' New
York Times, March 20, 2009.
\5\Full-Committee hearing entitled ``Monetary Policy and the State
of the Economy,'' July 12, 2017. Archived webcast available at https://
financialservices.house.gov/calendar/eventsingle.
aspx?EventID=402098.
Well, the FOMC, in its principles for normalization
of monetary policy, has clearly indicated that it
intends to return, over time, to a primarily treasury-
only portfolio, and that's in order not to influence
---------------------------------------------------------------------------
the allocation of credit in the economy.
Finally, recent research from the Federal Reserve Board
provides empirical support for this bi-partisan concern.\6\
According to the report's authors, both the first and third
round of unconventional monetary policies (that is, QE1 and
QE3) caused commercial banks to both lower their lending
standards and take on more risk. Moreover, these perverse
effects grew stronger as banks became more heavily invested in
MBS.
---------------------------------------------------------------------------
\6\Robert Kurtzman, Stephen Luck, and Tom Zimmermann, ``Did QE lead
banks to relax their lending standards? Evidence from the Federal
Reserve's LSAPs,'' Finance and Economics Discussion Series 2017-093,
Board of Governors of the Federal Reserve System, https://doi.org/
10.17016/FEDS.2017.093.
---------------------------------------------------------------------------
Coupled with common concerns from otherwise diverse
economic viewpoints, this research highlights how the
Independence from Credit Policy Act can provide for a more
stable financial system and a more productive allocation of
credit. H.R. 4278 provides for an orderly return of the Federal
Reserve's balance sheet to, as Chair Yellen described, ``a
primarily treasury-only portfolio.'' In addition, it maintains
the Federal Reserve's ability to act as our government's fiscal
agent during financial emergencies--that is, the Federal
Reserve can continue its role as an originator of emergency
loans, but must swap out unconventional assets aquired through
such lending facilities in return for Treasury securities of
equal value.
Hearings
The Subcommittee on Monetary Policy and Trade held a
hearing titled ``Examining Federal Reserve Reform Proposals''
to examine matters relating to H.R. 4278 on November 7, 2017.
Committee Consideration
The Committee on Financial Services met in open session on
November 14 and 15, 2017, and ordered H.R. 4278 to be reported
favorably to the House without amendment by a recorded vote of
33 yeas to 26 nays (Record vote no. FC-99), a quorum being
present.
Committee Votes
Clause 3(b) of rule XIII of the Rules of the House of
Representatives requires the Committee to list the record votes
on the motion to report legislation and amendments thereto. The
sole recorded vote was on a motion by Chairman Hensarling to
report the bill favorably to the House without amendment. The
motion was agreed to by a recorded vote of 33 yeas to 26 nays
(Record vote no. FC-99), a quorum being present.
Committee Oversight Findings
Pursuant to clause 3(c)(1) of rule XIII of the Rules of
the House of Representatives, the findings and recommendations
of the Committee based on oversight activities under clause
2(b)(1) of rule X of the Rules of the House of Representatives,
are incorporated in the descriptive portions of this report.
Performance Goals and Objectives
Pursuant to clause 3(c)(4) of rule XIII of the Rules of
the House of Representatives, the Committee states that H.R.
4278 will increase monetary policy independence and decrease
economic distortions by providing for the maintenance of a
Federal Reserve system that can serve as our government's
fiscal agent but not fiscal principal.
New Budget Authority, Entitlement Authority, and Tax Expenditures
The Committee has not received an estimate of new budget
authority contained in the cost estimate prepared by the
Director of the Congressional Budget Office pursuant to Sec.
402 of the Congressional Budget Act of 1974. In compliance with
clause 3(c)(2) of rule XIII of the Rules of the House, the
Committee opines that H.R. 4278 will not establish any new
budget or entitlement authority or create any tax expenditures.
Congressional Budget Office Estimates
The cost estimate prepared by the Director of the
Congressional Budget Office pursuant to Sec. 402 of the
Congressional Budget Act of 1974 was not submitted timely to
the Committee.
Federal Mandates Statement
This information is provided in accordance with section
423 of the Unfunded Mandates Reform Act of 1995. The Committee
has determined that the bill does not contain Federal mandates
on the private sector. The Committee has determined that the
bill does not impose a Federal intergovernmental mandate on
State, local, or tribal governments.
Advisory Committee Statement
No advisory committees within the meaning of section 5(b)
of the Federal Advisory Committee Act were created by this
legislation.
Applicability to Legislative Branch
The Committee finds that the legislation does not relate
to the terms and conditions of employment or access to public
services or accommodations within the meaning of the section
102(b)(3) of the Congressional Accountability Act.
Earmark Identification
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
Duplication of Federal Programs
In compliance with clause 3(c)(5) of rule XIII of the
Rules of the House of Representatives, the Committee states
that no provision of the bill establishes or reauthorizes: (1)
a program of the Federal Government known to be duplicative of
another Federal program; (2) a program included in any report
from the Government Accountability Office to Congress pursuant
to section 21 of Public Law 111-139; or (3) a program related
to a program identified in the most recent Catalog of Federal
Domestic Assistance, published pursuant to the Federal Program
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No.
98-169).
Disclosure of Directed Rulemaking
Pursuant to section 3(i) of H. Res. 5, (115th Congress),
the following statement is made concerning directed
rulemakings: The Committee estimates that the bill requires no
directed rulemakings within the meaning of such section.
Section-by-Section Analysis of the Legislation
Section 1. Short title
This section cites H.R. 4278 as the Independence from
Credit Policy Act of 2017.
Section 2. Independence from credit policy
This section provides for the Federal Reserve and the
Treasury to engage in asset swaps, whereby the Treasury
receives assets from the Federal Reserve that are neither gold
nor Treasury securities, nor direct obligations of foreign
central banks, or the International Monetary Fund, and in
return the Federal Reserve receives Treasury securities of
equivalent market value.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, and existing law in which no
change is proposed is shown in roman):
FEDERAL RESERVE ACT
* * * * * * *
[Sec. 10A. Upon receiving the consent of not less than five
members of the Board of Governors of the Federal Reserve
System, any Federal Reserve bank may make advances, in such
amount as the board of directors of such Federal Reserve bank
may determine, to groups of five or more member banks within
its district, a majority of them independently owned and
controlled, upon their time or demand promissory notes,
provided the bank or banks which receive the proceeds of such
advances as herein provided have no adequate amounts of
eligible and acceptable assets available to enable such bank or
banks to obtain sufficient credit accommodations from the
Federal Reserve bank through rediscounts or advances other than
as provided in section 10(b). The liability of the individual
banks in each group must be limited to such proportion of the
total amount advanced to such group as the deposit liability of
the respective banks bears to the aggregate deposit liability
of all banks in such group, but such advances may be made to a
lesser number of such member banks if the aggregate amount of
their deposit liability constitutes at least 10 per centum of
the entire deposit liability of the member banks within such
district. Such banks shall be authorized to distribute the
proceeds of such loans to such of their number and in such
amount as they may agree upon, but before so doing they shall
require such recipient banks to deposit with a suitable
trustee, representing the entire group, their individual notes
made in favor of the group protected by such collateral
security as may be agreed upon. Any Federal Reserve bank making
such advance shall charge interest or discount thereon at a
rate not less than 1 per centum above its discount rate in
effect at the time of making such advance. No such note upon
which advances are made by a Federal Reserve bank under this
section shall be eligible under section 16 of this Act as
collateral security for Federal Reserve notes.
[No obligations of any foreign government, individual,
partnership, association, or corporation organized under the
laws thereof shall be eligible as collateral security for
advances under this section.
[Member banks are authorized to obligate themselves in
accordance with the provisions of this section.]
Sec. 10B. (a) In General.--Any Federal Reserve bank, under
rules and regulations prescribed by the Board of Governors of
the Federal Reserve System, may make advances to any member
bank on its time or demand notes having maturities of not more
than four months and which are secured to the satisfaction of
such Federal Reserve bank.
Notwithstanding the foregoing, any Federal Reserve bank,
under rules and regulations prescribed by the Board of
Governors of the Federal Reserve System, may make advances to
any member bank on its time notes having such maturities as the
Board may prescribe and which are not secured by mortgage loans
covering a one-to-four family residence. Such advances shall
bear interest at a rate equal to the [lowest discount rate]
highest discount rate in effect at such Federal Reserve bank on
the date of such note.
(b) Limitations on Advances.--
(1) Limitation on extended periods.--Except as
provided in paragraph (2), no advances to any
undercapitalized depository institution by any Federal
Reserve bank under this section may be outstanding for
more than 60 days in any 120-day period.
(2) Viability exception.--
(A) In general.--If--
(i) the head of the appropriate
Federal banking agency certifies in
advance in writing to the Federal
Reserve bank that any depository
institution is viable; or
(ii) the Board conducts an
examination of any depository
institution and the Chairman of the
Board certifies in writing to the
Federal Reserve bank that the
institution is viable,
the limitation contained in paragraph (1) shall
not apply during the 60-day period beginning on
the date such certification is received.
(B) Extensions of period.--The 60-day period
may be extended for additional 60-day periods
upon receipt by the Federal Reserve bank of
additional written certifications under
subparagraph (A) with respect to each such
additional period.
(C) Authority to issue a certificate of
viability may not be delegated.--The authority
of the head of any agency to issue a written
certification of viability under this paragraph
may not be delegated to any other person.
(D) Extended advances subject to paragraph
(3).--Notwithstanding paragraph (1), an
undercapitalized depository institution which
does not have a certificate of viability in
effect under this paragraph may have advances
outstanding for more than 60 days in any 120-
day period if the Board elects to treat--
(i) such institution as critically
undercapitalized under paragraph (3);
and
(ii) any such advance as an advance
described in subparagraph (A)(i) of
paragraph (3).
(3) Advances to critically undercapitalized
depository institutions.--
(A) Liability for increased loss.--
Notwithstanding any other provision of this
section, if--
(i) in the case of any critically
undercapitalized depository
institution--
(I) any advance under this
section to such institution is
outstanding without payment
having been demanded as of the
end of the 5-day period
beginning on the date the
institution becomes a
critically undercapitalized
depository institution; or
(II) any new advance is made
to such institution under this
section after the end of such
period; and
(ii) after the end of that 5-day
period, the Deposit Insurance Fund of
the Federal Deposit Insurance
Corporation incurs a loss exceeding the
loss that the Corporation would have
incurred if it had liquidated that
institution as of the end of that
period,
the Board shall, subject to the limitations in
subparagraph (B), be liable to the Federal
Deposit Insurance Corporation for the excess
loss, without regard to the terms of the
advance or any collateral pledged to secure the
advance.
(B) Limitation on excess loss.--The liability
of the Board under subparagraph (A) shall not
exceed the lesser of the following:
(i) The amount of the loss the Board
or any Federal Reserve bank would have
incurred on the increases in the amount
of advances made after the 5-day period
referred to in subparagraph (A) if
those increased advances had been
unsecured.
(ii) The interest received on the
increases in the amount of advances
made after the 5-day period referred to
in subparagraph (A).
(C) Federal reserve to pay obligation.--The
Board shall pay the Federal Deposit Insurance
Corporation the amount of any liability of the
Board under subparagraph (A).
(D) Report.--The Board shall report to the
Congress on any excess loss liability it incurs
under subparagraph (A), as limited by
subparagraph (B)(i), and the reasons therefore,
not later than 6 months after incurring the
liability.
(4) No obligation to make advances.--A Federal
Reserve bank shall have no obligation to make,
increase, renew, or extend any advance or discount
under this Act to any depository institution.
(5) Definitions.--
(A) Appropriate federal banking agency.--The
term ``appropriate Federal banking agency'' has
the same meaning as in section 3 of the Federal
Deposit Insurance Act.
(B) Critically undercapitalized.--The term
``critically undercapitalized'' has the same
meaning as in section 38 of the Federal Deposit
Insurance Act.
(C) Depository institution.--The term
``depository institution'' has the same meaning
as in section 3 of the Federal Deposit
Insurance Act.
(D) Undercapitalized depository
institution.--The term ``undercapitalized
depository institution'' means any depository
institution which--
(i) is undercapitalized, as defined
in section 38 of the Federal Deposit
Insurance Act; or
(ii) has a composite CAMEL rating of
5 under the Uniform Financial
Institutions Rating System (or an
equivalent rating by any such agency
under a comparable rating system) as of
the most recent examination of such
institution.
(E) Viable.--A depository institution is
``viable'' if the Board or the appropriate
Federal banking agency determines, giving due
regard to the economic conditions and
circumstances in the market in which the
institution operates, that the institution--
(i) is not critically
undercapitalized;
(ii) is not expected to become
critically undercapitalized; and
(iii) is not expected to be placed in
conservatorship or receivership.
* * * * * * *
powers of federal reserve banks.
Sec. 13. Any Federal reserve bank may receive from any of its
member banks or other depository institutions, and from the
United States, deposits of current funds in lawful money,
national-bank notes, Federal reserve notes, or checks, and
drafts, payable upon presentation or other items, and also, for
collection, maturing notes and bills; or, solely for purposes
of exchange or of collection, may receive from other Federal
reserve banks deposits of current funds in lawful money,
national-bank notes, or checks upon other Federal reserve
banks, and checks and drafts, payable upon presentation within
its district or other items, and maturing notes and bills
payable within its district; or, solely for the purposes of
exchange or of collection, may receive from any nonmember bank
or trust company or other depository institution deposits of
current funds in lawful money, national-bank notes, Federal
reserve notes, checks and drafts payable upon presentation or
other items, or maturing notes and bills: Provided, Such
nonmember bank or trust company or other depository institution
maintains with the Federal reserve bank of its district a
balance in such amount as the Board determines taking into
account items in transit, services provided by the Federal
Reserve bank, and other factors as the Board may deem
appropriate: Provided further, That nothing in this or any
other section of this Act shall be construed as prohibiting a
member or nonmember bank or other depository institution from
making reasonable charges, to be determined and regulated by
the Board of Governors of the Federal Reserve System, but in no
case to exceed 10 cents per $100 or fraction thereof, based on
the total of checks and drafts presented at any one time, for
collection or payment of checks and drafts and remission
therefor by exchange or otherwise; but no such charges shall be
made against the Federal reserve banks.
Upon the indorsement of any of its member banks, which shall
be deemed a waiver of demand, notice and protest by such bank
as to its own indorsement exclusively, any Federal reserve bank
may discount notes, drafts, and bills of exchange arising out
of actual commercial transactions; that is, notes, drafts, and
bills of exchange issued or drawn for agricultural, industrial,
or commercial purposes, or the proceeds of which have been
used, or are to be used, for such purposes, the Board of
Governors of the Federal Reserve System to have the right to
determine or define the character of the paper thus eligible
for discount, within the meaning of this Act. Nothing in this
Act contained shall be construed to prohibit such notes,
drafts, and bills of exchange, secured by staple agricultural
products, or other goods, wares, or merchandise from being
eligible for such discount, and the notes, drafts, and bills of
exchange of factors issued as such making advances exclusively
to producers of staple agricultural products in their raw state
shall be eligible for such discount; but such definition shall
not include notes, drafts, or bills covering merely investments
or issued or drawn for the purpose of carrying or trading in
stocks, bonds, or other investment securities, except bonds and
notes of the Government of the United States. Notes, drafts,
and bills admitted to discount under the terms of this
paragraph must have a maturity at the time of discount of not
more than 90 days, exclusive of grace.
(3)(A) In unusual and exigent circumstances, the Board of
Governors of the Federal Reserve System, by the affirmative
vote of not less than five members, may authorize any Federal
reserve bank, during such periods as the said board may
determine, at rates established in accordance with the
provisions of section 14, subdivision (d), of this Act, to
discount for any participant in any program or facility with
broad-based eligibility, notes, drafts, and bills of exchange
when such notes, drafts, and bills of exchange are indorsed or
otherwise secured to the satisfaction of the Federal Reserve
bank: Provided, That before discounting any such note, draft,
or bill of exchange, the Federal reserve bank shall obtain
evidence that such participant in any program or facility with
broad-based eligibility is unable to secure adequate credit
accommodations from other banking institutions. All such
discounts for any participant in any program or facility with
broad-based eligibility shall be subject to such limitations,
restrictions, and regulations as the Board of Governors of the
Federal Reserve System may prescribe.
(B)(i) As soon as is practicable after the date of
enactment of this subparagraph, the Board shall
establish, by regulation, in consultation with the
Secretary of the Treasury, the policies and procedures
governing emergency lending under this paragraph. Such
policies and procedures shall be designed to ensure
that any emergency lending program or facility is for
the purpose of providing liquidity to the financial
system, and not to aid a failing financial company, and
that the security for emergency loans is sufficient to
protect taxpayers from losses and that any such program
is terminated in a timely and orderly fashion. The
policies and procedures established by the Board shall
require that a Federal reserve bank assign, consistent
with sound risk management practices and to ensure
protection for the taxpayer, a lendable value to all
collateral for a loan executed by a Federal reserve
bank under this paragraph in determining whether the
loan is secured satisfactorily for purposes of this
paragraph.
(ii) The Board shall establish procedures to
prohibit borrowing from programs and facilities
by borrowers that are insolvent. Such
procedures may include a certification from the
chief executive officer (or other authorized
officer) of the borrower, at the time the
borrower initially borrows under the program or
facility (with a duty by the borrower to update
the certification if the information in the
certification materially changes), that the
borrower is not insolvent. A borrower shall be
considered insolvent for purposes of this
subparagraph, if the borrower is in bankruptcy,
resolution under title II of the Dodd-Frank
Wall Street Reform and Consumer Protection Act,
or any other Federal or State insolvency
proceeding.
(iii) A program or facility that is
structured to remove assets from the balance
sheet of a single and specific company, or that
is established for the purpose of assisting a
single and specific company avoid bankruptcy,
resolution under title II of the Dodd-Frank
Wall Street Reform and Consumer Protection Act,
or any other Federal or State insolvency
proceeding, shall not be considered a program
or facility with broad-based eligibility.
(iv) The Board may not establish any program
or facility under this paragraph without the
prior approval of the Secretary of the
Treasury.
(C) The Board shall provide to the Committee on
Banking, Housing, and Urban Affairs of the Senate and
the Committee on Financial Services of the House of
Representatives--
(i) not later than 7 days after the Board
authorizes any loan or other financial
assistance under this paragraph, a report that
includes--
(I) the justification for the
exercise of authority to provide such
assistance;
(II) the identity of the recipients
of such assistance;
(III) the date and amount of the
assistance, and form in which the
assistance was provided; and
(IV) the material terms of the
assistance, including--
(aa) duration;
(bb) collateral pledged and
the value thereof;
(cc) all interest, fees, and
other revenue or items of value
to be received in exchange for
the assistance;
(dd) any requirements imposed
on the recipient with respect
to employee compensation,
distribution of dividends, or
any other corporate decision in
exchange for the assistance;
and
(ee) the expected costs to
the taxpayers of such
assistance; and
(ii) once every 30 days, with respect to any
outstanding loan or other financial assistance
under this paragraph, written updates on--
(I) the value of collateral;
(II) the amount of interest, fees,
and other revenue or items of value
received in exchange for the
assistance; and
(III) the expected or final cost to
the taxpayers of such assistance.
(D) The information required to be submitted to
Congress under subparagraph (C) related to--
(i) the identity of the participants in an
emergency lending program or facility commenced
under this paragraph;
(ii) the amounts borrowed by each participant
in any such program or facility;
(iii) identifying details concerning the
assets or collateral held by, under, or in
connection with such a program or facility,
shall be kept confidential, upon the written
request of the Chairman of the Board, in which
case such information shall be made available
only to the Chairpersons or Ranking Members of
the Committees described in subparagraph (C).
(E) If an entity to which a Federal reserve bank has
provided a loan under this paragraph becomes a covered
financial company, as defined in section 201 of the
Dodd-Frank Wall Street Reform and Consumer Protection
Act, at any time while such loan is outstanding, and
the Federal reserve bank incurs a realized net loss on
the loan, then the Federal reserve bank shall have a
claim equal to the amount of the net realized loss
against the covered entity, with the same priority as
an obligation to the Secretary of the Treasury under
section 210(b) of the Dodd-Frank Wall Street Reform and
Consumer Protection Act.
(F) Not later than 1 year after a Federal reserve
bank acquires any assets under this paragraph that are
neither gold nor direct obligations of the United
States, foreign central banks, or the International
Monetary Fund--
(i) the Board shall transfer such assets of
the Federal reserve bank to the Department of
the Treasury; and
(ii) the Secretary of the Treasury shall
transfer to the Federal reserve banks direct
obligations of the United States of equivalent
market value to the assets described in clause
(i).
Upon the indorsement of any of its member banks, which shall
be deemed a waiver of demand, notice, and protest by such bank
as to its own indorsement exclusively, and subject to
regulations and limitations to be prescribed by the Board of
Governors of the Federal Reserve System, any Federal reserve
bank may discount or purchase bills of exchange payable at
sight or on demand which grow out of the domestic shipment or
the exportation of nonperishable, readily marketable
agricultural and other staples and are secured by bills of
lading or other shipping documents conveying or securing title
to such staples: Provided, That all such bills of exchange
shall be forwarded promptly for collection, and demand for
payment shall be made with reasonable promptness after the
arrival of such staples at their destination: Provided further,
That no such bill shall in any event be held by or for the
account of a Federal reserve bank for a period in excess of
ninety days. In discounting such bills Federal reserve banks
may compute the interest to be deducted on the basis of the
estimated life of each bill and adjust the discount after
payment of such bills to conform to the actual life thereof.
The aggregate of notes, drafts, and bills upon which any
person, copartnership, association, or corporation is liable as
maker, acceptor, indorser, drawer, or guarantor, rediscounted
for any member bank, shall at no time exceed the amount for
which such person, copartnership, association, or corporation
may lawfully become liable to a national banking association
under the terms of section 5200 of the Revised Statutes, as
amended: Provided, however, That nothing in this paragraph
shall be construed to change the character or class of paper
now eligible for rediscount by Federal reserve banks.
Any Federal reserve bank may discount acceptances of the
kinds hereinafter described, which have a maturity at the time
of discount of not more than 90 days' sight, exclusive of days
of grace, and which are indorsed by at least one member bank:
Provided, That such acceptances if drawn for an agricultural
purpose and secured at the time of acceptance by warehouse
receipts or other such documents conveying or securing title
covering readily marketable staples may be discounted with a
maturity at the time of discount of not more than six months'
sight exclusive of days of grace.
(7)(A) Any member bank and any Federal or State branch or
agency of a foreign bank subject to reserve requirements under
section 7 of the International Banking Act of 1978 (hereinafter
in this paragraph referred to as ``institutions''), may accept
drafts or bills of exchange drawn upon it having not more than
six months' sight to run, exclusive of days of grace--
(i) which grow out of transactions involving the
importation or exportation of goods;
(ii) which grow out of transactions involving the
domestic shipment of goods; or
(iii) which are secured at the time of acceptance by
a warehouse receipt or other such document conveying or
securing title covering readily marketable staples.
(B) Except as provided in subparagraph (C), no institution
shall accept such bills, or be obligated for a participation
share in such bills, in an amount equal at any time in the
aggregate to more than 150 per centum of its paid up and
unimpaired capital stock and surplus or, in the case of a
United States branch or agency of a foreign bank, its dollar
equivalent as determined by the Board under subparagraph (H).
(C) The Board, under such conditions as it may prescribe, may
authorize, by regulation or order, any institution to accept
such bills, or be obligated for a participation share in such
bills, in an amount not exceeding at any time in the aggregate
200 per centum of its paid up and unimpaired capital stock and
surplus or, in the case of a United States branch or agency of
a foreign bank, its dollar equivalent as determined by the
Board under subparagraph (H).
(D) Notwithstanding subparagraphs (B) and (C), with respect
to any institution, the aggregate acceptances, including
obligations for a participation share in such acceptances,
growing out of domestic transactions shall not exceed 50 per
centum of the aggregate of all acceptances, including
obligations for a participation share in such acceptances,
authorized for such institution under this paragraph.
(E) No institution shall accept bills, or be obligated for a
participation share in such bills, whether in a foreign or
domestic transaction, for any one person, partnership,
corporation, association or other entity in an amount equal at
any time in the aggregate to more than 10 per centum of its
paid up and unimpaired capital stock and surplus, or, in the
case of a United States branch or agency of a foreign bank, its
dollar equivalent as determined by the Board under subparagraph
(H), unless the institution is secured either by attached
documents or by some other actual security growing out of the
same transaction as the acceptance.
(F) With respect to an institution which issues an
acceptance, the limitations contained in this paragraph shall
not apply to that portion of an acceptance which is issued by
such institution and which is covered by a participation
agreement sold to another institution.
(G) In order to carry out the purposes of this paragraph, the
Board may define any of the terms used in this paragraph, and,
with respect to institutions which do not have capital or
capital stock, the Board shall define an equivalent measure to
which the limitations contained in this paragraph shall apply.
(H) Any limitation or restriction in this paragraph based on
paid-up and unimpaired capital stock and surplus of an
institution shall be deemed to refer, with respect to a United
States branch or agency of a foreign bank, to the dollar
equivalent of the paid-up capital stock and surplus of the
foreign bank, as determined by the Board, and if the foreign
bank has more than one United States branch or agency, the
business transacted by all such branches and agencies shall be
aggregated in determining compliance with the limitation or
restriction.
Any Federal reserve bank may make advances for periods not
exceeding fifteen days to its member banks on their promissory
notes secured by the deposit or pledge of bonds, notes,
certificates of indebtedness or Treasury bills of the United
States, or by the deposit or pledge of debentures or other such
obligations of Federal intermediate credit banks which are
eligible for purchase by Federal reserve banks under section 13
(a) of this Act, or by the deposit or pledge of bonds issued
under the provisions of subsection (c) of section 4 of the Home
Owners' Loan Act of 1933, as amended; and any Federal reserve
bank may make advances for periods not exceeding ninety days to
its member banks on their promissory notes secured by such
notes, drafts, bills of exchange, or bankers' acceptances as
are eligible for rediscount or for purchase by Federal reserve
banks under the provisions of this Act, or secured by such
obligations as are eligible for purchase under section 14(b) of
this Act. All such advances shall be made at rates to be
established by such Federal reserve banks, such rates to be
subject to the review and determination of the Board of
Governors of the Federal Reserve System. If any member bank to
which any such advance has been made shall, during the life or
continuance of such advance, and despite an official warning of
the reserve bank of the district or of the Board of Governors
of the Federal Reserve System to the contrary, increase its
outstanding loans secured by collateral in the form of stocks,
bonds, debentures, or other such obligations, or loans made to
members of any organized stock exchange, investment house, or
dealer in securities, upon any obligation, note, or bill,
secured or unsecured, for the purpose of purchasing and/or
carrying stocks, bonds, or other investment securities (except
obligations of the United States) such advance shall be deemed
immediately due and payable, and such member bank shall be
ineligible as a borrower at the reserve bank of the district
under the provisions of this paragraph for such period as the
Board of Governors of the Federal Reserve System shall
determine: Provided, That no temporary carrying or clearance
loans made solely for the purpose of facilitating the purchase
or delivery of securities offered for public subscription shall
be included in the loans referred to in this paragraph.
The discount and rediscount and the purchase and sale by any
Federal reserve bank of any bills receivable and of domestic
and foreign bills of exchange, and of acceptances authorized by
this Act, shall be subject to such restrictions, limitations,
and regulations as may be imposed by the Board of Governors of
the Federal Reserve System. (Omitted from U.S. Code)
That in addition to the powers not vested by law in national
banking associations organized under the laws of the United
States any such association located and doing business in any
place the population of which does not exceed five thousand
inhabitants, as shown by the last preceding decennial census,
may, under such rules and regulations as may be prescribed by
the Comptroller of the Currency, act as the agent for any fire,
life, or other insurance company authorized by the authorities
of the State in which said bank is located to do business in
said State, by soliciting and selling insurance and collecting
premiums on policies issued by such company; and may receive
for services so rendered such fees or commissions as may be
agreed upon between the said association and the insurance
company for which it may act as agent: Provided, however, That
no such bank shall in any case assume or guarantee the payment
of any premium on insurance policies issued through its agency
by its principal: And provided further, That the bank shall not
guarantee the truth of any statement made by an assured in
filing his application for insurance.
Any member bank may accept drafts or bills of exchange drawn
upon it having not more than three months' sight to run,
exclusive of days of grace, drawn under regulations to be
prescribed by the Board of Governors of the Federal Reserve
System by banks or bankers in foreign countries or dependencies
or insular possessions of the United States for the purpose of
furnishing dollar exchange as required by the usages of trade
in the respective countries, dependencies, or insular
possessions. Such drafts or bills may be acquired by Federal
reserve banks in such amounts and subject to such regulations,
restrictions, and limitations as may be prescribed by the Board
of Governors of the Federal Reserve System: Provided, however,
That no member bank shall accept such drafts or bills of
exchange referred to this paragraph for any one bank to an
amount exceeding in the aggregate ten per centum of the paid-up
and unimpaired capital and surplus of the accepting bank unless
the draft or bill of exchange is accompanied by documents
conveying or securing title or by some other adequate security:
Provided further, That no member bank shall accept such drafts
or bills in an amount exceeding at any time the aggregate of
one-half of its paid-up and unimpaired capital and surplus.
(Omitted from U.S. Code)
Subject to such limitations, restrictions and regulations as
the Board of Governors of the Federal Reserve System may
prescribe, any Federal reserve bank may make advances to any
individual, partnership or corporation on the promissory notes
of such individual, partnership or corporation secured by
direct obligations of the United States or by any obligation
which is a direct obligation of, or fully guaranteed as to
principal and interest by, any agency of the United States.
Such advances shall be made for periods not exceeding 90 days
and shall bear interest at rates fixed from time to time by the
Federal reserve bank, subject to the review and determination
of the Board of Governors of the Federal Reserve System.
Subject to such restrictions, limitations, and regulations as
may be imposed by the Board of Governors of the Federal Reserve
System, each Federal Reserve bank may receive deposits from,
discount paper endorsed by, and make advances to any branch or
agency of a foreign bank in the same manner and to the same
extent that it may exercise such powers with respect to a
member bank if such branch or agency is maintaining reserves
with such Reserve bank pursuant to section 7 of the
International Banking Act of 1978. In exercising any such
powers with respect to any such branch or agency, each Federal
Reserve bank shall give due regard to account balances being
maintained by such branch or agency with such Reserve bank and
the proportion of the assets of such branch or agency being
held as reserves under section 7 of the International Banking
Act of 1978. For the purposes of this paragraph, the terms
``branch,''``agency,'' and ``foreign bank'' shall have the same
meanings assigned to them in section 1 of the International
Banking Act of 1978.
* * * * * * *
open-market operations
Sec. 14. Any Federal reserve bank may, under rules and
regulations prescribed by the Board of Governors of the Federal
Reserve System, purchase and sell in the open market, at home
or abroad, either from or to domestic or foreign banks, firms,
corporations, or individuals, cable transfers and bankers'
acceptances and bills of exchange of the kinds and maturities
by this Act made eligible for rediscount, with or without the
indorsement of a member bank.
Every Federal reserve bank shall have power:
(a) To deal in gold coin and bullion at home or abroad, to
make loans thereon, exchange Federal reserve notes for gold,
gold coin, or gold certificates, and to contract for loans of
gold coin or bullion, giving therefor, when necessary,
acceptable security, including the hypothecation of United
States bonds or other securities which Federal reserve banks
are authorized to hold;
[(b)(1) To buy and sell, at home or abroad, bonds and notes
of the United States, bonds issued under the provisions of
subsection (c) of section 4 of the Home Owners' Loan Act of
1933, as amended, and having maturities from date of purchase
of not exceeding six months, and bills, notes, revenue bonds,
and warrants with a maturity from date of purchase of not
exceeding six months, issued in anticipation of the collection
of taxes or in anticipation of the receipt of assured revenues
by any State, county, district, political subdivision, or
municipality in the continental United States, including
irrigation, drainage and reclamation districts, and obligations
of, or fully guaranteed as to principal and interest by, a
foreign government or agency thereof, such purchases to be made
in accordance with rules and regulations prescribed by the
Board of Governors of the Federal Reserve System.
Notwithstanding any other provision of this Act, any bonds,
notes, or other obligations which are direct obligations of the
United States or which are fully guaranteed by the United
States as to principal and interest may be bought and sold
without regard to maturities but only in the open market.
[(2) To buy and sell in the open market, under the direction
and regulations of the Federal Open Market Committee, any
obligation which is a direct obligation of, or fully guaranteed
as to principal and interest by, any agency of the United
States.]
(b) To buy and sell in the open market, at home or abroad,
under the direction and regulations of the Federal Open Market
Committee, gold stock, Treasury currency, or direct obligations
of the United States, foreign central banks, or the
International Monetary Fund. Nothing in this subsection shall
be construed to limit advances under section 10B, or discount
loans under sections 13, 13A, or 24.
(c) To purchase from member banks and to sell, with or
without its indorsement, bills of exchange arising out of
commercial transactions, as hereinbefore defined;
(d) To establish from time to time, subject to review and
determination of the Board of Governors of the Federal Reserve
System, rates of discount to be charged by the Federal reserve
bank for each class of paper, which shall be fixed with a view
of accommodating commerce and business; but each such bank
shall establish such rates every fourteen days, or oftener if
deemed necessary by the Board;
(e) To establish accounts with other Federal reserve banks
for exchange purposes and, with the consent or upon the order
and direction of the Board of Governors of the Federal Reserve
System and under regulations to be prescribed by said board, to
open and maintain accounts in foreign countries, appoint
correspondents, and establish agencies in such countries
wheresoever it may be deemed best for the purpose of
purchasing, selling, and collecting bills of exchange, and to
buy and sell, with or without its indorsement, through such
correspondents or agencies, bills of exchange (or acceptances)
arising out of actual commercial transactions which have not
more than ninety days to run, exclusive of days of grace, and
which bear the signature of two or more responsible parties,
and, with the consent of the Board of Governors of the Federal
Reserve System, to open and maintain banking accounts for such
foreign correspondents or agencies, or for foreign banks or
bankers, or for foreign states as defined in section 25 (b) of
this Act. Whenever any such account has been opened or agency
or correspondent has been appointed by a Federal reserve bank,
with the consent of or under the order and direction of the
Board of Governors of the Federal Reserve System, any other
Federal reserve bank may, with the consent and approval of the
Board of Governors of the Federal Reserve System, be permitted
to carry on or conduct, through the Federal reserve bank
opening such account or appointing such agency or
correspondent, any transaction authorized by this section under
rules and regulations to be prescribed by the board.
(f) To purchase and sell in the open market, either from or
to domestic banks, firms, corporations, or individuals,
acceptances of Federal Intermediate Credit Banks and of
National Agricultural Credit Corporations, whenever the Board
of Governors of the Federal Reserve System shall declare that
the public interest so requires.
(g) The Board of Governors of the Federal Reserve System
shall exercise special supervision over all relationships and
transactions of any kind entered into by any Federal reserve
bank with any foreign bank or banker, or with any group of
foreign banks or bankers, and all such relationships and
transactions shall be subject to such regulations, conditions,
and limitations as the Board may prescribe. No officer or other
representative of any Federal reserve bank shall conduct
negotiations of any kind with the officers or representatives
of any foreign bank or banker without first obtaining the
permission of the Board of Governors of the Federal Reserve
System. The Board of Governors of the Federal Reserve System
shall have the right, in its discretion, to be represented in
any conference or negotiations by such representative or
representatives as the Board may designate. A full report of
all conferences or negotiations, and all understandings or
agreements arrived at or transactions agreed upon, and all
other material facts appertaining to such conferences or
negotiations, shall be filed with the Board of Governors of the
Federal Reserve System in writing by a duly authorized officer
of each Federal reserve bank which shall have participated in
such conferences or negotiations.
* * * * * * *
MINORITY VIEWS
H.R. 4278, the so-called ``Independence from Credit Policy
Act,'' purports to address Republicans' concern that monetary
policies are morphing into credit policies. However, the bill
fundamentally misunderstands the role of the Federal Reserve
and its conduct of monetary policy. At its core, the purpose of
monetary policy is to manage the level of interest rates and
thereby influence the availability and cost of credit in the
economy. In doing so, the Federal Reserve affects spending,
investment, production, employment and inflation within the
U.S. economy. Put simply, monetary policy and credit policy are
fundamentally linked, and as the Center for Popular Democracy
points out in a letter submitted for the record ``mak[ing] the
Fed independent from credit policy--is neither possible nor
desirable.''
However, H.R. 4278 does not just misunderstand the Federal
Reserve's role in setting monetary policy, it would fully
eliminate the Federal Reserve's ability to purchase certain
assets, including GSE mortgage-backed securities (MBS) going
forward--an important tool that was deployed effectively by the
Federal Reserve in response to the 2008 financial crisis. Had
this legislation been in effect prior to the 2008 crisis, the
Federal Reserve would have been unable to make the significant
MBS purchases that supported the flow of credit to the housing
sector--a sector that was deeply impaired.
At a legislative hearing held by the Subcommittee on
Monetary Policy and Trade to examine this proposal, Dr. Jared
Bernstein wrote in his testimony that restricting the Federal
Reserve's asset purchases in the manner called for in this bill
``would have been a serious mistake that would likely have
prolonged the downturn.''\1\ Dr. Bernstein's testimony also
cited research supporting the positive effects of the Federal
Reserve's MBS purchases. For example, he noted that research
conducted by economists Diana Hancock and Wayne Passmore found
that the Federal Reserve's MBS purchases lowered mortgage rates
by roughly 1 to 1.5 percentage points.
---------------------------------------------------------------------------
\1\Dr. Jared Bernstein, Testimony before the U.S. House of
Representatives, Subcommittee on Monetary Policy and Trade hearing
titled Examining Federal Reserve Reform Proposals, (November 7, 2017)
available at https://financialservices.house.gov/uploadedfiles/hhrg-
115-ba19-wstate-jbernstein-20171107.pdf.
---------------------------------------------------------------------------
Other experts have also highlighted the important benefits
of the Federal Reserve's MBS purchases. For example, in April
2017, Dr. William Spriggs noted that the Federal Reserve's MBS
purchases ``helped to stabilize housing prices'' and also
``help[ed] stabilize the household balance sheet.''\2\
Similarly, Dr. Alan S. Blinder and Dr. Mark Zandi have noted
that the Federal Reserve's MBS purchases ``helped end the
housing crash.''\3\ Taking away the Federal Reserve's authority
to purchase MBS--which has put money back in the pockets of
creditworthy borrowers and helped shore up the home values of
those who were devastated by the subprime crisis--would be
foolish and shortsighted.
---------------------------------------------------------------------------
\2\Dr. William E. Spriggs, Testimony before the U.S. House of
Representatives, Subcommittee on Monetary Policy and Trade hearing
titled Examining the Federal Reserve's Mandate and Governance
Structure, (April 4, 2017), available at https://
financialservices.house.gov/uploadedfiles/hhrg-115-ba19-wstate-
wspriggs-20170404.pdf.
\3\Dr. Alan S. Blinder and Dr. Mark Zandi, ``The Financial Crisis:
Lessons for the Next One,'' (October 15, 2015), available at https://
www.cbpp.org/research/economy/the-financial-crisis-
lessons-for-the-next-one.
---------------------------------------------------------------------------
We also note that unlike many other major central banks,
the Federal Reserve is relatively limited in terms of the
assets it can purchase in its conduct of monetary policy.
Whereas the central banks of England, Japan, Canada and Europe
have few restrictions on the kinds of assets they can purchase,
our central bank is generally limited to purchasing Treasury
and GSE securities. In discussing this proposal, Dr. Bernstein
noted that, in a sense, Americans were ```lucky' that the cause
of the recession was the bursting of the housing bubble, as a
channel existed by which the Fed could prevent the excessive
tightening of credit in that sector.'' Rather than constrain
its ability to respond to financial crises, Congress should
consider the ways in which the Federal Reserve can be more
effective in correcting the damages that households may suffer
as a result of any future downturn.
Finally, the swap of MBS with Treasury assets called for in
the bill creates a number of additional problems. Specifically,
the bill fails to account for the fact that the issuance of
Treasury debt that would be needed for such a swap to occur
would also require Congress to raise the debt ceiling. Without
the inclusion of a provision to lift the debt ceiling, such
legislation could not go into effect. Under the unlikely
scenario where the debt ceiling is lifted to allow the bill to
go into effect, the bill nonetheless fails to contemplate what
Treasury would do with the MBS. The sale of the assets would
likely cause needless volatility in financial markets, and
increase mortgage rates, taking money out of the pockets of
middle class families and slowing the economy's recovery.
For these reasons, we oppose this bill.
Maxine Waters.
Stephen F. Lynch.
Carolyn B. Maloney.
David Scott.
Daniel T. Kildee.
Michael E. Capuano.
Ruben J. Kihuen.
Vicente Gonzales.
Gwen Moore.
Nydia M. Velazquez.
Ed Perlmutter.
Gregory W. Meeks.
Al Green.
Brad Sherman.
Emanuel Cleaver.
[all]
