New Fed rule limits emergency lending power

Washington

IN the lead-up to the financial crisis of 2008, the US Federal Reserve had the ability to make huge emergency loans to almost any entity it chose, a power it used to help save Wall Street firms from possible collapse.

Now, seven years later, the Fed, under the direction of Congress, has adopted a new rule that would place restrictions on its extraordinary financial powers. The restrictions, which stem from the Dodd-Frank Act of 2010, aim to make sure that the Fed's emergency loans are not used to shore up insolvent firms.

The five members of the Fed's board on Monday voted to approve the rule, which takes effect on Jan 1.

The Fed's emergency loans point to a quandary at the heart of the financial system. Many specialists say central banks, so-called lenders of last resort, need to have a free hand to lend liber…