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1. The Federal Reserve System Discount WindowCredit FacilitiesWestern Independent Bankers February 11, 2009 Rick Miller
Credit Risk Management
Director
2. 2 Presentation Outline Background information
Overview of Discount Window lending programs
Questions
3. 3 The Federal Reserve is theU.S. Central Bank Serves as the “bank” for all segments of the banking system: commercial banks, thrifts, and credit unions
4. 4 System Structure - Districts
5. 5 Background Information Statutory and Regulatory Considerations
Federal Reserve Act
Monetary Control Act of 1980
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
Regulations A and D
6. 6 Discount Window Functions Act as a safety valve in relieving pressures in reserve markets
Backup source of liquidity for individual institutions
Relieve liquidity strains in the banking system
Assure the basic stability of money markets
7. 7 Discount Window Credit Programs Primary Credit generally available for short periods of time, usually overnight; flexible with smaller institutions
Secondary Credit may be available to institutions not in satisfactory financial condition
Seasonal Credit available to small institutions with a pronounced seasonal funding need.
8. 8 Enhance monetary policy implementation
Reduce stigma in coming to Window
Simplify administration
Improve consistency across Federal Reserve System
Specifically supported by inter-agency statement dated July 23, 2003
Objectives of Primary &Secondary Credit Programs
9. 9 Eligibility Primary Credit
CAMELS 1, 2, or 3
At least adequately capitalized
Supplementary information supports sound condition
Secondary Credit
Not eligible for Primary Credit
Discretion of the Reserve Bank
10. 10 Primary vs. Secondary Credit
11. 11 Primary vs. Secondary Credit
12. 12 Seasonal Borrowing Program Established in early 1970s to assist smaller institutions
Must demonstrate seasonal pattern
Qualifying institutions are typically in agricultural or tourist areas.
Institutions with deposits over $500 million will not qualify
13. 13 Seasonal Borrowing Program Any single loan under the program may be for up to 30 days
May access the program for 9 months out of a 12 month period
Market rate adjusted every two weeks based on average Fed funds rate and 90 day CD rate
14. 14 Recent Changes to Federal Reserve Liquidity Provisions Adjustments to Primary Credit Facility
Term Auction Facility
Primary Dealer Credit Facility
Term Secured Lending Facility
15. 15 Primary Credit Program Adjustments to Primary Credit Facility
Spread of lending rate to Fed Funds Rate cut to 50 basis points in August 2007 and to 25 basis points in March 2008
Loan terms extended to 30 days in August 2007 and to 90 days in March 2008 and renewable
From August 2007 to May 2008 Fed Funds Rate and Discount Rate lowered 8 times
16. 16 Term Auction Facility Established December 12, 2007
Bi-weekly auctions of 28-day Discount Window credit
Same collateral as for primary credit
Competitive bid process with highest bid rates being awarded
$150 billion auctioned currently
In place at least until market conditions improve
17. 17 Primary Dealer Credit Facility Established March 16, 2008
A “standing facility” available to primary dealers
Overnight lending
Rate is same as primary credit rate
Eligible collateral includes a broad range of investment-grade debt securities
18. 18 Term Securities Lending Facility (TSLF) Established March 11, 2008
Available to primary dealers
Like TAF, TSLF is an auction facility
Auctions relatively illiquid securities in exchange for Treasury securities
Weekly auctions of security lending operations for 28-day terms
Reserves neutral
19. 19 Actions Taken by Board of Governors Extended the Primary Dealer Credit Facility and the Term Securities Lending Facility through January 30, 2009
Introduced auctions of options on $50 billion of draws on the Term Securities Lending Facility
Introduced an 84-day Term Auction Facility (TAF) loan as a complement to the 28-day loan
Increased the Fed’s swap line with the European Central Bank (ECB) to $55 billion from $50 billion
Announced a new collateral requirement for advances of more than 28-days in maturity (both term-auction credit and term primary credit but not seasonal credit)
20. 20 Access to the Window Documentation
To borrow from the Discount Window:
Authorizing Resolutions for Borrowers
Letter of Agreement
Official OC-10 Authorization List
Certificate
Collateral
All advances must be secured by acceptable collateral.
21. 21 Wide Range of Collateral Securities
Treasury
Agency
Municipal
ABS
Corporate Bonds
Loans
Consumer
Commercial & Industrial
Commercial Real Estate
Construction
Raw Land
22. 22 Borrower-In-Custody Program Pledged loan collateral held on premises
In acceptable financial condition
Identify pledged assets
Provide monthly list of pledged loans
Expect periodic collateral inspections
23. 23 Contingency Planning Essential For All Banking Organizations
Understand funding sources and availability
Have written formal contingency funding arrangements in place
Test periodically
24. 24 The Federal Reserve System Ultimate liquidity provider to the market and individual banking organizations
25. 25 Discount Window Website www.frbdiscountwindow.org
Summary of Credit programs & Detailed Collateral Information
Federal Reserve Board Press Releases
Frequently Asked Questions (FAQs)
Operating Circular 10
Acceptable Collateral and Margin Table
Links to each Reserve Bank
26. 26
27. 27 Federal Reserve Bank of San Francisco Contacts
Rick Miller, Director, 415 974 2974
Javier Jerez, Senior Manager, 415 974 2500
David Xu, Manager 415 974 2218