Fed's Secret Sauce: Uncovering the Limits of Section 13(3)

The Federal Reserve's emergency lending authority, Section 13(3), has been misunderstood by many in the crypto market. This provision, added to the Federal Reserve Act in 1932 and amended in 2010, allows the Fed to lend beyond banks in unusual circumstances.

However, under the Dodd-Frank Act of 2010, emergency lending must now be broad-based, rather than targeted at a single firm, and borrowers must be solvent. Collateral must also protect taxpayers from losses, and the Treasury secretary's approval is required for any program.

The Fed's failure to use Section 13(3) in the 2023 rescue of USDC, which restored its peg, has led some to assume that this power would be used to bail out a failing stablecoin issuer. However, under current law, such a move would likely be illegal.