1980: The Smallest Crisis in Fed History?

Unusual and (un)exigent circumstances

A quick programming note: Apologies for this blog having been relatively quiet. As many of you know, I’ve been working in a policy role at the FDIC, and thus not publicly commenting on anything with policy implications while I’m in that seat. However, this post is just some good old-fashioned Fed esoterica with no implication for present policy. Some old FOIA requests have produced something interesting to Fed wonks…

In March of 2008, the Fed started lending under its emergency authority provided under Section 13(3) of the Federal Reserve Act, which allows the Fed to provide liquidity to essentially any type of entity, in response to the Global Financial Crisis. It was the first time the Fed had provided liquidity under a 13(3) authorization since the Great Depression.

The Fed would go on to use the authority for 15 separate programs during the GFC. It would use it for eight programs during the pandemic. Most recently, the Fed used it for one program—the Bank Term Funding Program—during the Banking Crisis of 2023. The Fed can only invoke the Section 13(3) facility when a supermajority of the Fed Board determines that “unusual and exigent circumstances” are present and—since 2010—the Treasury secretary concurs.

Former Fed Chair Ben Bernanke noted that the March 11, 2008 press release for the Term Securities Lending Facility “lacked any mention of emergency powers or 13(3) authority. (We worried that trumpeting the invocation of emergency powers last used in the Depression would deepen the panic.)”

Indeed, this is how the emergency authority is often described: as not having been used between the Great Depression (when the authority was created) and the Global Financial Crisis. Occasionally, a slightly more correct version of this history will prevail and mention that 13(3) was invoked, but not lent under, in 1966, 1969, and 1980.

Prior to a 1980 law change, banks that were not “members” of the Federal Reserve System (so-called “state nonmember banks”) did not have direct access to the discount window. National banks and state member banks (those state banks whose primary federal regulator was the Fed) had direct access to the window. The Depository Institutions Deregulation and Monetary Control Act (DIDMCA) extended discount window access to state-regulated banks and thrifts that were not members of the Federal Reserve System.

In 1966 and 1969, higher interest rates put funding pressures on nonmember commercial banks, mutual savings banks, and savings and loan associations. Because these firms were not Fed members, they did not have direct discount window access. The Fed Board invoked 13(3) to allow the Federal Reserve Banks to lend to these firms and replace the lost deposit funding. The 1966 and 1969 invocations were effective for several months, but no loans were made. These programs are mentioned in some of the public historical documents of the Fed. (See, e.g., Howard Hackley’s Lending Functions Of The Federal Reserve Banks: A History.)

To my knowledge, there is just one public source that mentions there was also a 1980 invocation of Section 13(3). A 2009 speech from the then-general counsel of the New York Fed, Tom Baxter, said that in 1980, “the authority was activated – but not used – to grant a loan to a Michigan nonmember bank to pay for cash letters presented to it.” (This speech has largely disappeared from the internet, but a copy lives in the Yale Program of Financial Stability Resource Library here.)

A FOIA request for Fed Board materials related to the 1980 invocation fills out the picture—though the bank in question was in Kansas, not Michigan. The documents provided include the minutes of the March 21, 1980 Fed Board meeting (now accessible here) and of the March 27, 1980 meeting (now accessible here).

On March 21, 1980 the Fed Board invoked Section 13(3) to enable the Federal Reserve Bank of Kansas City, per the latter’s request, to lend to the Mission State Bank and Trust Company (“Mission”)—which was a state nonmember bank, and thereby not eligible for the discount window. The Fed Board authorized the Kansas City Fed to lend up to $5 million until March 27, when it could be extended. On March 27, the Fed extended the authorization to April 2. The DIDMCA became law on March 31, 1980, providing discount window access to the bank and obviating the need for the 13(3) lending.

A new threshold?

This is a little weird. While 13(3) programs have been relatively common in the 21st century, the bar for invocation of unusual and exigent circumstances has yet been pretty high: systemwide banking stresses and a pandemic. The 1960s invocations were also related to systemwide banking stresses (among nonmember banks and thrifts), and the Great Depression was the Great Depression.

Mission was the 13th largest bank in the Kansas City metro area and had $100 million in assets, hardly significant on a national scale. Moreover, no other banks were targeted by the 13(3) invocation, suggesting limited concern over contagion. While the Board minutes are slightly redacted, it seems the bank was losing deposits, and a restructuring of its balance sheet was ongoing. The minutes did note “possible adverse effects on other financial institutions in the community if the bank failed.”

There have been plenty of much more destabilizing moments in markets since 1980, for most of which I’d bet 13(3) invocation wasn’t even discussed. Given the flexibility around usage of 13(3), it’s not obvious that an invocation is any way binding precedent for the Fed (aside from what the market comes to expect). The Fed invoking the 13(3) authority for a similarly situated group of firms today (the Fed can no longer target an individual firm) seems inconceivable.

The March 21 Board minutes noted, “Board members were concerned that granting this authority might set a precedent for approval of similar requests that might be made in the future.” The minutes went on to say, however, that the authority should be invoked given the DIDMCA “legislation was expected to be approved within the next few days. Under that law, the bank would gain immediate access to the discount window on the same terms and conditions as those for member banks. As a compromise, it was suggested that the authority might be extended for only a few days.”

The minutes go on to emphasize that the Board did not want this to viewed as precedent:

However, it was reiterated that the Board would prefer that this authority not be used, and that this action did not set a precedent for other institutions that were not similarly affected by the pending legislation.

The March 27 minutes, which make clear that the loan had yet to be drawn on, reiterated:

At today’s meeting, members of the Board expressed the same reservations as they had at the previous meeting. However, in view of the proposed membership and reserve requirement legislation that was expected to be enacted within the next few days and under which the bank would gain immediate access to the discount window on the same terms and conditions as those for member banks, the Board extended the authorization through April 2, 1980.

All told, this is really just more unusual than exigent. Basically, a new law was reasonably expected in short order, under which the Fed would be able to lend to Mission under its standard discount window authority (Section 10B of the Federal Reserve Act). The Fed used 13(3) as a bridge to the ultimate passage of that law, despite the bank in question not really being one of much import. There’s not an obvious takeaway here, and the Fed was clear that this use of the authority was not to set any precedent except for for other banks similarly affected by the pending legislation. But, at the very least, this piece of Fed history should live on. Mission State Bank and Trust Company failed later that year.

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