Fed’s Chief Attorney Says Faster Disclosure May Be Harmful

The Federal Reserve’s chief attorney said a two-year delay in identifying recipients of emergency loans from the central bank is appropriate and that a shorter lag may harm the financial system and U.S. economy.

“We remain concerned that a more rapid release of information about borrowers accessing the discount window and emergency lending facilities could impair the ability of the Federal Reserve to provide the liquidity needed to ensure the smooth working of the financial system,” Scott Alvarez, general counsel for the Board of Governors, said today. Alvarez commented in joint testimony with Thomas Baxter, general counsel for the Federal Reserve Bank of New York, to a House Financial Services subcommittee.

While the two Fed attorneys didn’t cite a specific proposal to alter the delay enacted in last year’s Dodd-Frank Act, Representative Ron Paul, the Texas Republican who chairs the subcommittee and who has advocated abolishing the central bank, backs legislation to strip the Fed’s shield from congressional audits of its interest-rate decisions and loan programs.

Paul said during the hearing that his goal is to gain more transparency without bringing about any harm. He compared Fed disclosure to the Securities and Exchange Commission, which can demand reports and release information immediately, Paul said.

The central bank in December, under orders from Congress, identified recipients of $3.3 trillion of emergency aid from 2007 to 2010. In March, the Fed released about 29,000 pages of documents covering other loan programs after losing a court battle against Bloomberg LP, parent of Bloomberg News, and News Corp.’s Fox News Network LLC.


The Dodd-Frank law requires the Fed to identify borrowers about two years after loans are made.

“If institutions believe that publication of their use of Federal Reserve lending facilities will impair public confidence in the institution, then institutions may choose not to participate in these facilities,” Alvarez and Baxter said.

“Experience has shown that banks’ unwillingness to use the discount window can result in more volatile short-term interest rates and reduced financial market liquidity that, in turn, can contribute to declining asset prices and reduced lending to consumers and small businesses,” according to the two men’s testimony.

The Standard & Poor’s 500 Financials Index, which includes 82 banks and other financial companies, has gained 3.8 percent since the first round of mandated disclosures on Dec. 1.

More Transparency

Asked during the hearing by Representative Lacy Clay, a Missouri Democrat, if the increased Fed transparency has had any adverse consequences for the central bank or the firms it regulates, Alvarez said the disclosure, especially in monetary policy, has been “very helpful.” The Fed is monitoring any other effects and will tell Congress if changes are warranted, Alvarez said.

Representative Walter Jones, a North Carolina Republican, said the central bank is at a “very low ebb” in terms of trust among the U.S. public, and “is not held in high esteem by many people in this country.” He asked the Fed officials how the central bank could give emergency aid to non-U.S. banks and large companies such as McDonald’s Corp. while small-business owners have trouble getting bank loans.

Alvarez responded that the Fed’s emergency-lending programs weren’t designed to aid large companies “for the sake of aiding big companies” and were instead designed to ease credit for the broader population, even if they work through banks or financial markets. One program helped generate 3 million automobile loans, he said.

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