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Connectedness and ContagionProtecting the Financial System from Panics$
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Hal S. Scott

Print publication date: 2016

Print ISBN-13: 9780262034371

Published to MIT Press Scholarship Online: January 2017

DOI: 10.7551/mitpress/9780262034371.001.0001

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Strengthening the LLR Powers of the Fed

Strengthening the LLR Powers of the Fed

(p.137) 11 Strengthening the LLR Powers of the Fed
Connectedness and Contagion

Hal S. Scott

The MIT Press

This chapter focuses on ways to strengthen the Fed's role as lender of last resort (LLR). The first approach is to follow the lead of other central banks by dividing LLR powers between normal times through the discount window and special times through emergency procedures, rather than dividing lending authority up between banks and nonbanks. Second, there should be a more flexible and clearer policy about collateral for emergency assistance. A third reform would be to abandon the ad hoc nature of decision making about when to lend by adopting an advance commitment approach. A fourth reform of LLR could be to consider opening LLR facilities to mutual market funds (MMFs), given the dangers of MMF runs. A fifth point of reform is to give the Fed free and complete access to supervisory information collected by other regulators that bears on solvency. The fragmented regulatory structure contributes to the Fed's incomplete picture of the financial system. The LLR capabilities of the Fed would be strengthened by better regulatory coordination and collection of information, without necessarily increasing the regulatory authority of the Fed.

Keywords:   lender of last resort, Federal Reserve, financial policy, mutual market funds, financial regulation, regulatory reform, monetary policy

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