Exigent Circumstances: Section 13(3) of the Federal Reserve Act and Federal Emergency Lending Programs

NORTH CAROLINA BANKING INSTITUTE Volume 25 Issue 1 Article 6 3-1-2021 Exigent Circumstances: Section 13(3) of the Federal Reserve Act and Federal Emergency Lending Programs Todd H. Eveson Follow this and additional works at: https://scholarship.law.unc.edu/ncbi Part of the Law Commons Recommended Citation Todd H. Eveson, Exigent Circumstances: Section 13(3) of the Federal Reserve Act and Federal Emergency Lending Programs, 25 N.C. BANKING INST. 103 (2020). Available at: https://scholarship.law.unc.edu/ncbi/vol25/iss1/6 This Article is brought to you for free and open access by Carolina Law Scholarship Repository. It has been accepted for inclusion in North Carolina Banking Institute by an authorized editor of Carolina Law Scholarship Repository. For more information, please contact . Exigent Circumstances: Section 13(3) of the Federal Reserve Act and Federal Emergency Lending Programs TODD H. EVESON* I. INTRODUCTION AND OVERVIEW Section 13(3) of the Federal Reserve Act authorizes Federal Reserve Banks, in “unusual and exigent circumstances” and upon the affirmative vote of at least five members of the Federal Reserve Board of Governors, to discount notes, drafts, and bills of exchange for participants in liquidity facilities or other credit programs.1 This article will present a brief history of Section 13(3) of the Federal Reserve Act and examine selected instances during which its powers have been invoked. It will also compare and contrast two of the most significant emergency funding programs of the modern era: the TARP Capital Purchase Program of 2008 (“TARP CPP”)2 and the Paycheck Protection Program of 2020 (“PPP”). 3 Neither TARP CPP nor PPP was implemented under Section 13(3) authority (nor, for various reasons, could they have been). Both programs were, however, launched in close coordination with Section 13(3) facilities established by the Federal Reserve that were designed to support and complement them as part of an integrated emergency response solution. II. HISTORY OF SECTION 13(3) OF THE FEDERAL RESERVE ACT The Federal Reserve Act4 created the nation’s first true central bank, established the member bank system, and, along with the National 5 * Todd H. Eveson is a partner at Wyrick Robbins Yates & Ponton LLP. 1. See 12 U.S.C. §343(3) (2018). 2. The Capital Purchase Program was an element of the Troubled Asset Relief Program (“TARP”) and promulgated under the authority of the Emergency Economic Stabilization Act of 2008. 12 U.S.C. §5201, et seq. 3. The Paycheck Protection Program was promulgated under the authority of Title I of the Coronavirus Aid, Relief and Economic Security Act of 2020. Pub. L. No. 116-136, 134 Stat. 281, 286–94 (2020) (to be codified in scattered sections of 15 U.S.C.). 4. Federal Reserve Act, Pub. L. No. 63-43, 38 Stat. 251 (1913). 5. More precisely, it created a decentralized central bank consisting of 12 member banks. See History of the Federal Reserve, FED. RES. EDUC., 104 NORTH CAROLINA BANKING INSTITUTE [Vol. 25 Bank Act of 18646 and the Bank Act of 1933,7 has served as the foundation for much of the federal regulation of banking and financial services in the United States.8 The original goal of the Federal Reserve Act was “to make certain that there will always be an available supply of money and credit in the country with which to meet unusual banking requirements.”9 It set out to accomplish this goal by providing a new, more efficient, and centralized source of liquidity for banks.10 More pointedly, it was intended to prevent the need for private bailouts by the https://www.federalreserveeducation.org/about-the-fed/history [https://perma.cc/J7TTVQAS]. 6. Ch. 106, 13 Stat. 99, 101 (codified as amended at 12 U.S.C. § 38); see also LISSA L. BROOME & JERRY W. MARKHAM, REGULATION OF BANK FINANCIAL SERVICE ACTIVITIES 22– 23 (4th ed. 2011); JONATHAN R. M ACEY & GEOFFREY P. MILLER, BANKING LAW AND REGULATION 10–11 (2d ed. 1997). 7. Pub. L. No. 73-66, 48 STAT. 162 (1933); see also BROOME & MARKHAM, supra note 6, at 38, 42–44; MACEY & MILLER, supra note 6, at 21–24. More commonly referred to as the Glass-Steagall Act and the Federal Deposit Insurance Act, the Banking Act of 1933 created the “firewall” between commercial banking and investment banking that was eventually removed by the Gramm-Leach-Bliley Act of 1999, and it also established the Federal Deposit Insurance Corporation. The conversation on federal deposit insurance had been a longrunning one, spanning almost 50 years and approximately 150 different proposals over the years. See MATTHEW P. FINK, THE UNLIKELY REFORMER: CARTER GLASS AND FINANCIAL REGULATION 105–106 (2019). Not to be confused with the Glass-Steagall Act of 1933, it was the Glass-Steagall Act of 1932 that amended the Federal Reserve Act by adding Section 10B, “giving the Federal Reserve Board temporary emergency authority to allow advances to member banks secured by satisfactory collateral at a penalty rate of interest in cases where the borrowing bank had exhausted its eligible assets.” See Parinitha Sastry, The Political Origins of Section 13(3) of the Federal Reserve Act, FED. RES. BANK N.Y. POL’Y REV., Sept. 2018, at 1; Arthur Long, Revised Section 13(3) of the Federal Reserve Act, ABA BUS. L. TODAY 1 (Mar. 22, 2019), https://businesslawtoday.org/2019/03/revised-section-133-federal-reserve-act/ [https://perma.cc/N55A-QHX6]. The Federal Reserve was authorized to exercise authority under Section 10B only in “exceptional and exigent circumstances.” See Glass-Steagall Act of 1932, Pub. L. No 72-44, § 2, 47 Stat. 56 (adding section 10B to the Federal Reserve Act). In that respect, it was an emergency power that could only be invoked during “exigent circumstances” and therefore similar to the soon-to-follow Section 13(3). Section 13(3), however, was to be even more broad in terms of the emergency powers it would vest in the Federal Reserve, because it would not be limited to member banks and would, instead, include essentially any entity in the private sector. See infra notes 33–40 and accompanying text. 8. See Saule T. Omarova, The Dodd-Frank Act: A New Deal for a New Age, 15 N.C. BANKING INST. 83, 84 (2011); William C. Handorf et al, An Examination of the Factors Influencing the Enactment of Banking Legislation and Regulation: Evidence from Fifty Years of Banking Laws and Twenty-Five Years of Regulation, 24 N.C. BANKING INST. 93 (2020). 9. See O. M. W. Sprague, The Federal Reserve Act of 1913, 28 Q. J. ECON. 213, 213 (1914); Ben S. Bernanke, A Century of US Central Banking: Goals, Frame, Accountability, 27 J. ECON. PERSP., Fall 2013, at 3, 4 stating that the new Federal Reserve was intended to provide an “elastic” currency “by providing liquidity as needed to individual member banks through the discount window,” but it was not necessarily envisioned as a “lender of last resort”) . 10. See id. 2021] EMERGENCY LENDING POWERS 105 likes of J.P. Morgan, as had occurred during the 1907 panic. 11 (...truncated)