Hence, the emergency credit would generally be provided only to groups of institutions that were regulated and supervised to limit such moral hazard. If the Federal Reserve did not directly supervise the institutions that would potentially receive emergency discount window credit, we would need an ongoing and collaborative relationship with the supervisor.
The supervisor should ensure that any institution with implicit access to emergency discount window credit nevertheless maintained conservative liquidity policies. The supervisor would also provide critical insight into the financial condition of the borrower and the quality of the available collateral and more generally whether lending was necessary and appropriate.