The Federal Reserve building in Washington September 1, 2015. Reuters/Kevin Lamarque
The Federal Reserve Board on Monday approved a proposal to curb its emergency lending powers, a change demanded by Congress after the central bank’s controversial decision to aid AIG (AIG.N), Citigroup (C.N) and others in 2008.
The rule, unanimously approved by the Fed’s Washington-based board in an open meeting, requires that any future emergency lending be only “broad-based” to address larger financial market problems, and not tailored to specific firms.
The 2010 Dodd-Frank financial reform law instructed the Fed to curtail emergency loans to individual banks and prohibited it from lending to companies considered insolvent.
While some at the Fed worry the new rules will hamper the central bank’s response in future crises, some politicians have said the proposed regulations are too imprecise, for example in defining insolvency, to prevent the types of deals done in 2008.
Fed Governor Daniel Tarullo said during the meeting that the regulations would provide better balance between the Fed’s need to respond in a crisis and the concern that helping specific companies considered “too big to fail” created the wrong set of incentives for managers at companies expecting to be bailed out.
There has been “a longstanding tension of confronting moral hazard with wanting to retain flexibility,” said Tarullo, the Fed’s point person on regulatory issues.
As the financial crisis intensified in 2008, the Fed invoked its little-used emergency lending power to stave off the failure of AIG and Bear…