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What is Emergency Credit?

Malcolm Tatum
By
Updated: May 17, 2024

Emergency credit is a loan that is provisioned with extended terms and offered to financial institutions other than banks. In the United States, the loans are written through the Federal Reserve Bank, and extended to financial organizations such as savings and loan associations. The current qualifications require the 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 typically classified as long-term, meaning the duration of the loan is longer than thirty calendar days.

The use of emergency credit often involves circumstances where a financial institution is encountering some degree of temporary financial stress, but has potential for overcoming the problem and becoming a lucrative enterprise once again. In the interim, the credit obtained through the loan of federal funds helps to ensure that the institution is able to continue operations, and provide services to its clients. Loans of this type help to keep the economy stable by allowing employees of the institution to retain their jobs, and by helping the institution honor its debts to other lenders, investors, and others who have some type of connection to the institution.

While it is not often mentioned, the same laws that allow a non-bank financial institution to apply for a loan from a Federal Reserve Bank also allow non-financial institutions, such as business corporations, to apply for emergency credit. As long as the corporation has exhausted other possible options for financing, it is possible to submit an application and possibly obtain support for an extended period of time.

The concept of emergency credit is not new. For a number of decades, laws in the United States have allowed for this type of lending activity. The most current legislation, known as the Federal Deposit Insurance Corporation Improvement Act of 1991, expanded the provisions of the Federal Reserve Act. This act, known as the FDICIA, makes it possible for emergency credit to be extended in a wider range of bailout options, including any type of financial stability plan that is authorized by Congress to aid the country in moving through a period of nationwide economic distress. Proponents of this type of credit arrangement consider the measures necessary to avoid a repetition of the American Depression of the 1930s. Opponents to the current structure of emergency credit sometimes voice concerns about the wider latitude in use since 1991, and favor either a complete abolition of the credit option, or overhauling the measure to focus specifically on support to non-bank financial institutions.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including WiseGeek, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.
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Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
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