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Federal Reserve ends 'too big to fail' lending policy

The ruling puts the Federal reserve in line with the 2010 Dodd-Frank Act.

By
Ed Adamczyk
The Federal Reserve announced new rules on emergency lending Monday. Federal Reserve Board Chair Janet Yellen said AIG, bailed out in 2008, would not have received a loan under the new rules. File photo by Kevin Dietsch/UPI
The Federal Reserve announced new rules on emergency lending Monday. Federal Reserve Board Chair Janet Yellen said AIG, bailed out in 2008, would not have received a loan under the new rules. File photo by Kevin Dietsch/UPI | License Photo

WASHINGTON, Nov. 30 (UPI) -- The Federal Reserve Board approved a rule Monday prohibiting the government from extending emergency loans to "too big to fail" companies.

The practice of intervening with loans was essential during the global financial crisis of 2008 and 2009, but was formally abandoned Monday to keep within the confines of the Dodd-Frank Act, passed in 2010.

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The new limits, taking effect Jan. 1, mean the Federal Reserve is only allowed to loan money to "programs and facilities with 'broad-based eligibility' that have been established with the approval of the Secretary of the Treasury," a Federal Reserve statement said.

By "broad-based," it refers to any method not designed to aid ailing firms, and must be available to at least five business entities.

Federal Reserve Chair Janet Yellen said the 2008 extension of up to $85 billion credit to AIG, an international insurance company imperiled during the financial crisis, would have been prevented by the new rules.

"Emergency lending is a critical tool that can be used in times of crisis to help mitigate extraordinary pressures in financial markets that would otherwise have severe adverse consequences for households, businesses, and the U.S. economy," Yellen said.

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