Emergency credit is a loan offered to financial institutions other than banks, issued through the Federal Reserve Bank in the US. Loans are classified as long-term and can be extended to nonfinancial institutions. The Federal Deposit Insurance Corporation Improvement Act of 1991 expanded on the provisions of the Federal Reserve Act, making it possible for emergency credit to be extended into a broader range of bailout options.
Emergency credit is a loan provided with extended terms and offered to financial institutions other than banks. In the United States, loans are issued through the Federal Reserve Bank and extended to financial organizations such as savings and loan associations. Current qualifications require organizations to seek loans from other financial institutions first; If no other option is available, the organization can apply for a loan through the Federal Deposit Insurance Corporation, or FDIC. Loans of this type are generally classified as long-term, which means that the duration of the loan is greater than thirty calendar days.
The use of emergency credit often involves circumstances in which a financial institution finds itself in some degree of temporary financial stress, but has the potential to overcome the problem and return to being a profitable business. In the meantime, the credit obtained through the federally funded loan helps ensure that the institution can continue its operations and provide services to its clients. Loans of this type help keep the economy stable by allowing the institution’s employees to keep their jobs and by helping the institution pay off its debts to other lenders, investors, and others with some connection to the institution.
Although not often mentioned, the same laws that allow a nonbank financial institution to apply for a loan from a Federal Reserve Bank also allow nonfinancial institutions, such as business corporations, to apply for emergency credit. While the corporation has exhausted other possible funding options, it is possible to apply and possibly get support for an extended period of time.
The concept of emergency credit is not new. For several decades, laws in the United States have permitted this type of lending activity. The most current legislation, known as the Federal Deposit Insurance Corporation Improvement Act of 1991, expanded on the provisions of the Federal Reserve Act. This law, known as FDICIA, makes it possible for emergency credit to be extended into a broader range of bailout options, including any type of financial stability plan that is authorized by Congress to help the country through a period of national economic difficulties. . Proponents of this type of credit arrangement consider measures necessary to avoid a repeat of the American depression of the 1930s. Opponents of the current structure of emergency credit sometimes express concerns about the broader latitude in use since 1991. , and favor the complete abolition of the credit option or the revision of the measure to focus specifically on supporting non-bank financial institutions.
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