Responding to Financial System Emergencies

In times of crisis, the financial markets that businesses and households rely on may experience severe stress or, in extreme cases, effectively cease to function. Employers often rely on these markets to raise the cash they need to meet payroll and cover near-term operating costs. These markets also serve households as investment options for their savings or to facilitate loans to buy cars and homes or to attend college. Because these markets are vital to the economy, the Federal Reserve—like many central banks—is empowered to take actions that can restore the normal flow of credit needed to support employment and the broader economy.

There are a number of ways the Federal Reserve can support the flow of credit, in addition to using its monetary policy tools (federal funds rate, discount window loans, open market operations, forward guidance, and asset purchases) for responding to changes in the economy and financial markets. These include:

  •  U.S. dollar funding facilities. Our only responsibility is to the United States and its people. Sometimes, though, economic problems in other countries, particularly in foreign financial markets, can spill over to the United States. To prevent that, the Federal Reserve has arrangements with other central banks to help stabilize our financial system and support our economy. Those arrangements involve the exchange—on a temporary basis—of dollars for the foreign central bank’s currency. After the temporary period, the transaction is reversed. These transactions do not impose costs or risks on American taxpayers.
  • Emergency lending. Under section 13(3) of the Federal Reserve Act, the Federal Reserve also has authority to lend to eligible businesses—including nonfinancial firms—in “unusual and exigent circumstances.” In 2015, the Federal Reserve published details of how it would use this authority in Regulation A. During the pandemic, 13(3) lending facilities established by the Federal Reserve helped support the flow of credit to households and businesses, supporting economic activity. Without these programs, research shows that employment losses would have been far greater and the decline in economic activity much deeper. By law, these emergency lending programs must be broad-based and not designed to support a single institution, among other requirements. In addition, Congress requires that the Federal Reserve ensure that taxpayers are protected against losses. Consistent with this, actions taken under section 13(3) authority are taken with the approval of the Treasury secretary.

Special Programs Implemented by the Federal Reserve due to “Unusual and Exigent” Circumstances

In the spring of 2020, in response to COVID-19, the Federal Reserve established a number of programs designed to support the credit needs of households and businesses. Several of these programs had previously been established and proved useful during the 2007 to 2009 financial crisis.

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Last Update: December 17, 2021