[Federal Register Volume 67, Number 101 (Friday, May 24, 2002)]
[Proposed Rules]
[Pages 36544-36551]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-12781]
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FEDERAL RESERVE SYSTEM
12 CFR Part 201
Regulation A; Docket No. R-1123
Extensions of Credit by Federal Reserve Banks
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Proposed rule.
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SUMMARY: The Board of Governors is publishing for comment a proposed
amendment to Regulation A that would replace the existing adjustment
and extended credit programs with new discount window programs called
primary credit and secondary credit, respectively. This proposed
restructuring of Federal Reserve credit programs is designed to improve
the functioning of the discount window and does not represent a change
in the stance of monetary policy. The proposed rule also would
reorganize and streamline existing provisions of Regulation A. The
Board solicits comment on all aspects of the proposal.
DATES: Comments on the proposed rule must be received not later than
August 22, 2002.
ADDRESSES: Comments should refer to docket number R-1123 and should be
sent to Ms. Jennifer J. Johnson, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, NW.,
Washington, DC, 20551 or mailed electronically to
[email protected]. Comments addressed to Ms. Johnson
also may be delivered between 8:45 a.m. and 5:15 p.m. to the Board's
mail facility in the west courtyard of the Eccles Building, located on
21st Street between Constitution Avenue and C Street, NW. Members of
the public may inspect comments in accordance with the Board's Rules
Regarding the Availability of Information (12 CFR part 261) in Room MP-
500 of the Martin Building on weekdays between 9 a.m. and 5 p.m.
FOR FURTHER INFORMATION CONTACT: Brian Madigan, Deputy Director (202/
452-3828) or William Nelson, Senior Economist (202/452-3579), Division
of Monetary Affairs; or Stephanie Martin, Assistant General Counsel
(202/452-3198) or Adrianne Threatt, Senior Attorney (202/452-3554),
Legal Division; for users of Telecommunication Devices for the Deaf
(TDD) only, contact 202/263-4869.
SUPPLEMENTARY INFORMATION:
Background
Current Credit Programs of Reserve Banks and Their Relationship to
Monetary Policy and Open Market Operations
Under existing Regulation A, the Reserve Banks may make credit
available to depository institutions at the discount window by making
advances secured by acceptable collateral or by discounting paper that
meets the requirements of the Federal Reserve Act. Reserve Bank credit
usually takes the form of an advance.
Reserve Banks make credit available at the discount window through
three credit programs: adjustment credit, seasonal credit, and extended
credit. Adjustment credit is available for short periods of time at a
basic discount rate that, over the past decade, typically has been 25
to 50 basis points below the market rates that apply to overnight
loans, as indexed by the federal funds rate. Reserve Banks also extend
seasonal credit for longer periods than permitted under the adjustment
credit program to help smaller depository institutions meet funding
needs that result from expected patterns in their deposits and loans.
Finally, Reserve Banks may provide extended credit to depository
institutions where similar assistance is not reasonably available from
other sources. The rates applied to seasonal and extended credit are at
or above the basic discount rate.
When implementing monetary policy, the Federal Reserve relies
primarily on open market operations to supply reserves to the banking
system and currency to the public and to make short-run adjustments in
reserves. However, lending to depository institutions through the
discount window aids the Federal Reserve's open market operations in
two important ways. First, discount window lending provides additional
reserves to the overall banking system when the supply of reserves
provided through open market operations falls short of demand. Second,
discount window lending provides a temporary source of reserves and
funding to financially sound individual depository institutions that
have experienced an unexpected shortfall in reserves or funding.
Discount window credit permits such an institution to make payments
without incurring an overdraft in its Federal Reserve account or
failing to meet its reserve requirements. Historically the Federal
Reserve System has relied on the adjustment credit program to
accomplish these two objectives.
The discount window also can, at times, serve as a useful tool for
promoting financial stability by providing temporary funding to
depository institutions that are experiencing significant financial
difficulties. The provision of credit to a troubled depository
institution can help to prevent the sudden collapse of the institution
by easing liquidity strains while the institution is making a
transition to more sound footing, or by facilitating an orderly closure
of the institution. An institution obtaining credit in such a situation
must be monitored appropriately to ensure that it does not take
excessive risks in an attempt to return to profitability and does not
use central bank credit in a manner that would increase costs to the
deposit insurance fund of resolving the institution if resolution were
to become necessary. Historically, the Federal Reserve System has
relied on extended credit to aid depository institutions experiencing
significant financial difficulties.
The Rationale for Changing the Basic Framework Through Which Reserve
Banks Extend Credit
A below-market discount rate creates incentives for institutions to
obtain adjustment credit to exploit the spread between the discount
rate and the market rates for short-term loans. Regulation A therefore
provides that a Reserve Bank cannot extend adjustment credit to a
depository institution until
[[Page 36545]]
the institution exhausts other sources of funds. Regulation A also
provides that recipients may not use adjustment credit to finance sales
of federal funds.
Because of the restrictions necessitated by a below-market discount
rate, a substantial degree of Reserve Bank administration is associated
with adjustment credit. In particular, the Reserve Bank may need to
review each prospective borrower's funding situation to establish that
the borrower has exhausted other reasonably available sources of funds
and that the reason for borrowing is appropriate. Because that
evaluation necessarily is subjective, achieving a reasonable degree of
consistency in credit administration across the System is difficult.
The administration of and restrictions on discount window credit
create a burden on depository institutions that reduces their
willingness to seek credit at the discount window. In addition, the
rules governing discount window credit have proved difficult to
explain, and depository institutions often have cited uncertainty about
their borrowing privileges as a disincentive to seek credit. Depository
institutions also have expressed concern about the requirement that
borrowers fully utilize other sources of funds before borrowing
adjustment credit. Institutions have expressed concern that turning to
the window after signaling in the market their need for funds could be
interpreted as a sign of weakness, particularly during periods of
financial stress. Concerns such as these have limited the willingness
of depository institutions to borrow at the discount window, even in
circumstances of extremely tight money markets where such borrowing
would have been appropriate. The reluctance to borrow in turn has
limited the discount window's effectiveness in buffering shocks to
money markets.
In light of the drawbacks associated with the current below-market
discount window programs, the Board believes that the interests of
depository institutions, the Federal Reserve System, and the economy
more generally would be served more effectively by an above-market
lending program. Under the Board's proposed rule, Reserve Banks would
extend credit under the primary credit program to institutions the
Reserve Banks determine to be generally sound. Primary credit usually
would be extended at an above-market rate, which should essentially
eliminate the incentive for institutions to seek discount window credit
simply to exploit the usual spread between the discount rate and short-
term market rates. Eliminating this incentive would reduce sharply the
need for administration regarding the extension and use of Federal
Reserve credit. The streamlined eligibility criteria also should
encourage greater uniformity in administration of the discount window
across Federal Reserve districts. By minimizing a Reserve Bank's need
to question potential borrowers, not requiring that an institution
first attempt to borrow elsewhere, making the borrowing program
significantly more transparent, and limiting extensions of primary
credit to generally sound financial institutions, the proposed above-
market lending program should reduce depository institutions'
reluctance to borrow when money markets tighten sharply. As a result,
the discount window should become a more effective policy instrument.
The Board reiterates that replacing the current below-market
adjustment credit program with an above-market program would not signal
a shift in the stance of monetary policy. Rather, the proposed changes
represent a broad structural change that should enable the discount
window to operate more efficiently as a source of funds for individual
depository institutions and as a mechanism for implementing the policy
objectives of the Federal Reserve System. The proposed structure of
providing credit at the margin at above-market interest rates also
would be similar to mechanisms adopted by other major central banks.
Section-by-Section Analysis
The Proposed Changes to the Discount Lending Framework--[sect][sect]
201.4 and 201.51
The Board proposes to replace the adjustment credit with a new
lending program called primary credit and the extended credit program
with a new program known as secondary credit. Although the proposed
regulation retains the seasonal credit program with minor revisions, as
discussed in more detail below the Board specifically requests comment
on whether a seasonal credit program remains necessary and, if so,
whether the interest rate on seasonal credit would more appropriately
be set at the primary discount rate. As required by the Federal Reserve
Act, all advances made under the proposed discount lending programs
would have to be adequately collateralized. The Reserve Banks'
collateral policies would be unchanged and they would continue to
accept a broad range of financial assets as collateral for discount
window loans.
The substantive changes to the lending programs are contained in
[sect] 201.4 of the proposed rule, which replaces existing [sect]
201.3. The rates that apply to the proposed lending programs are
described in [sect] 201.51, which combines and replaces existing
[sect][sect] 201.51-201.52.
Primary Credit
Primary credit would replace adjustment credit, would be extended
on a very short-term basis (usually overnight) at an above-market rate,
and ordinarily would be available to generally sound depository
institutions with little or no administrative burden on the borrower or
the Reserve Banks. A Reserve Bank also could extend primary credit with
maturities up to a few weeks to a depository institution if the Reserve
Bank finds that the institution is in generally sound condition and
cannot obtain such credit in the market on reasonable terms. The Board
expects that institutions receiving longer-term primary credit would be
relatively small institutions that lack access to national money
markets.
Although the primary credit program is designed to make short-term
credit available as a backup source of liquidity to generally sound
institutions, a Reserve Bank is not obligated to extend primary credit.
A Reserve Bank therefore may choose not to lend to a generally sound
depository institution if the Reserve Bank determines that doing so
would be inconsistent with the purposes of the primary credit program.
Section 201.4(a) of the proposed rule describes the primary credit
program, and [sect] 201.51(a) sets forth the rate that applies to
primary credit.
1. Interest Rate Applicable to Primary Credit
The interest rate on primary credit ordinarily would be above
short-term market interest rates, including the target federal funds
rate, and would be set by the boards of directors of the Reserve Banks
subject to review and determination by the Board of Governors. A
substantial spread between the discount and market rates would
encourage depository institutions to use primary credit only to meet
short-term, unforeseen needs. If the spread were too wide, however, the
primary discount rate would not cap the federal funds rate at a
reasonable level above the rate targeted by the Federal Open Market
Committee (FOMC).
The Board proposes to recommend that the boards of directors of the
Reserve Banks, subject to the Board's review and determination,
initially establish a primary discount rate that is
[[Page 36546]]
100 basis points above the FOMC's then-prevailing target for the
federal funds rate. A spread of 100 basis points would be similar to
the spreads employed by other central banks and likely would place the
primary discount rate somewhat above the alternative cost of overnight
funds for eligible depository institutions. The Board believes that
public comment could help inform the Federal Reserve System's choice of
the initial spread between the federal funds and discount rates and
assist the boards of directors of the Reserve Banks when they establish
rates subsequently. The Board therefore specifically solicits comment
regarding the interest rate spread.
After establishment of the initial primary discount rate, the
Federal Reserve System would change that rate through a process
identical to the existing discretionary procedure for changing the
basic discount rate. The boards of directors of the Federal Reserve
Banks would establish a primary discount rate and other discount rates
every two weeks subject to review and determination by the Board of
Governors, as required by the Federal Reserve Act. The primary discount
rate presumably would move broadly in line with the target federal
funds rate, much as the basic discount rate does currently.
2. Eligibility for Primary Credit
Under the proposed regulation, only depository institutions deemed
generally sound in the judgment of the Reserve Bank would be eligible
to obtain primary credit. Reserve Banks would classify depository
institutions with borrowing agreements already on file as either
eligible or ineligible for primary credit before a primary credit
program takes effect and would notify each such institution of its
status. A new applicant for Federal Reserve credit would be notified of
its eligibility after filing borrowing documents with the appropriate
Federal Reserve Bank. The Reserve Banks would notify an institution
promptly of any change in the institution's eligibility status. An
institution's eligibility status, which would be based in part on that
institution's confidential supervisory and examination information,
would be considered confidential information and the Federal Reserve
System would handle it accordingly.
The Board expects that the Reserve Banks would adopt on a System-
wide basis uniform guidelines for judging the degree of an
institution's financial soundness and thus its eligibility for primary
credit. The Board envisions that the guidelines for determining
eligibility would be based primarily on supervisory ratings, but
supplementary information, such as ratings issued by major rating
agencies, spreads on subordinated debt, and information from
supervisory exams in progress, also would be considered. The Board
further expects that the majority of depository institutions would be
eligible for the primary credit program under such guidelines.
The Board anticipates that Reserve Banks initially would adopt
guidelines under which domestically chartered depository institutions
with composite CAMELS ratings of 1 or 2 and U.S. branches and agencies
of foreign banking organizations with Strength of Support Assessment
(SOSA) composite rankings of 1 would be eligible for primary credit,
unless supplementary information suggested that the financial condition
of the depository institution had deteriorated since the most recent
exam. Similarly, the Board expects that under the initial guidelines
institutions rated CAMELS 3 or SOSA 2 would be eligible for primary
credit if supplementary information suggested that they were generally
sound. However, the funding situation of such institutions seeking
credit would be reviewed and monitored more closely than that of
stronger institutions. The Board expects that institutions rated CAMELS
4 or SOSA 3 would be ineligible for primary credit except in rare
circumstances, such as an ongoing examination that indicated a
substantial improvement in condition. The Board further anticipates
that institutions rated CAMELS 5 would in no case be eligible for
primary credit and could obtain only secondary credit.
Because lending to troubled institutions would be subject to
careful monitoring, the expected eligibility criteria would be
consistent with the intent of the guidelines for discount window
lending included in section 10B(b) of the Federal Reserve Act, as added
by the Federal Deposit Insurance Corporation Improvement Act. The
criteria also would be consistent with the guidelines used by Federal
Reserve Banks to determine institutions' access to daylight credit in
the Payments System Risk policy. In general, the depository
institutions that qualify for access to daylight credit would qualify
for primary credit, and those that would not qualify for daylight
credit would be restricted to secondary credit.
A depository institution that meets the eligibility criteria
adopted by the Reserve Banks would not be required to exhaust other
reasonable available sources of funds before obtaining primary credit.
The removal of this requirement is consistent with the overall
reduction in discount window administration under the proposed new
discount window structure. In addition, depository institutions that
receive primary credit would be free to sell federal funds to others.
This would enhance the ability of the primary credit rate to serve as a
cap on the federal funds rate when money markets tighten. The Board
would encourage financially sound institutions to use primary credit to
fund sales of federal funds if such transactions were in their
financial interest.
3. Benefits of a Primary Credit Program
Because of the reduced administration and corresponding reduction
in the reluctance of depository institutions to borrow, the Board
expects that primary credit would serve as a more effective safety
valve for the banking system and a backup source of liquidity for
individual depository institutions that are financially sound.
The proposal to adopt a primary credit program also is an aspect of
the Federal Reserve's ongoing planning for contingencies. The Federal
Reserve System expects to establish special procedures through which
the System could lower discount rates quickly in an emergency. If, as
the Board intends, the availability of primary credit significantly
reduces the reluctance of depository institutions to use the discount
window, the System should be able to cap the federal funds rate near
the target during a crisis by reducing the primary discount rate to a
level close to the federal funds target rate. During a financial market
crisis, the proposed discount window structure therefore would provide
a means of preventing an undue tightening of money markets if
depository institutions' demands for excess reserves rose sharply, if
disruptions inhibited the flow of funds through the banking system, or
if the Federal Reserve's ability to carry out open market operations
were impaired.
In addition, the Board expects that moving to an above-market
primary credit program would be beneficial to the Federal Reserve
System as the mechanisms by which the Board implements monetary policy
evolve. For example, if Congress authorizes the Federal Reserve Banks
to pay interest on reserve balances, an above-market lending program
would allow the Reserve Banks to avoid lending to depository
institutions at a below-market rate while paying interest to those
institutions at a market-related rate. Also, if the level of required
operating balances resumes the substantial downward decline
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experienced for much of the last decade, a lending program with
appreciably less administration could enhance the day-to-day
implementation of monetary policy. A decline in operating balances
could lead to increased volatility in the federal funds rate, and the
availability of reserves from an above-market lending facility would
serve to limit the increase in volatility.
Secondary Credit
Secondary credit would replace extended credit and would be
available to depository institutions that do not qualify for primary
credit. Because some institutions that currently are eligible for
adjustment credit would not qualify for primary credit, secondary
credit potentially would be used more often than has the extended
credit program. The text of the proposed regulation therefore seeks to
eliminate the focus on longer-term credit extensions in the existing
extended credit program and to recognize the somewhat broader class of
borrowing situations that a Reserve Bank may handle under the secondary
credit program.
Section 201.4(b) of the proposed rule describes the secondary
credit program, and [sect] 201.51(b) describes the interest rate that
applies to secondary credit.
Under the proposal, Federal Reserve Banks may extend secondary
credit to meet temporary funding needs of an institution if such a
credit extension would be consistent with the institution's timely
return to a reliance on market funding sources. A Reserve Bank also may
extend secondary credit if it determines that such credit would
facilitate the orderly resolution of serious financial difficulties of
the borrowing institution. When extending secondary credit to an
undercapitalized or critically undercapitalized depository institution,
a Reserve Bank also must observe the requirements set forth at proposed
[sect] 201.5. The interest rate on secondary credit would be set by
formula 50 basis points above the primary discount rate. This higher
rate reflects the less-sound condition of borrowers of secondary
credit.
Seasonal Credit
Section 201.4 of the proposed rule makes only minor revisions to
the existing seasonal credit provisions of Regulation A. The seasonal
credit interest rate is based on short-term market rates, and
historical interest rate relationships suggest that the rate for
seasonal credit usually will be below the primary credit rate. Sections
201.4 and 201.51(c) of the proposed rule, which discuss the rate
applicable to seasonal credit, would not contain existing language
requiring the seasonal credit rate to be at least as high as the
primary credit rate. In addition, the System for some time has not
required that a seasonal credit borrower demonstrate that it could not
obtain similar assistance from special industry lenders, and the
proposed rule accordingly deletes this requirement.
The seasonal credit program originally was designed to address the
difficulties that relatively small banks with substantial intra-yearly
swings in funding needs faced because of a lack of access to the
national money markets. Reserve Banks traditionally have extended
seasonal credit to small institutions that demonstrate significant
seasonal swings in their loans and deposits. However, funding
opportunities for smaller depository institutions appear to have
expanded significantly over the past few decades as a result of deposit
deregulation and the general development of financial markets. The
Board therefore specifically solicits comment on whether small
depository institutions still lack reasonable access to funding
markets; on the desirability of eliminating the seasonal lending
program; and on the appropriate setting of the seasonal lending rate,
particularly in view of the proposed establishment of a primary credit
program with an above-market rate. Depending on the comments received,
the Board may decide to adjust the rate applicable to seasonal credit
or to eliminate the seasonal credit program altogether.
Reorganization of and Proposed Changes to Other Provisions of
Regulation A
In addition to replacing the adjustment and extended credit
programs with primary and secondary credit programs, respectively, the
Board also proposes to reorganize much of existing Regulation A in
order to streamline the text of the rule and make it easier to read and
understand. In addition, the Board proposes to delete certain
provisions of existing Regulation A that are obsolete or superfluous.
Deletion of Provisions Concerning the Century Date Change Special
Liquidity Facility (SLF)
The Board previously amended Regulation A so that depository
institutions would have access to an SLF from October 1, 1999, to April
7, 2000, to ease liquidity pressures unique to the century date change
period. The SLF for U.S. depository institutions is described at
existing [sect] 201.3(e), and the circumstances under which a U.S.
branch or agency of a foreign bank could use the facility are described
at existing [sect] 201.7(b). Sections 201.2(j)-(k) define two terms--
``eligible institution'' and ``targeted federal funds rate,''
respectively--that pertain only to the SLF provisions. Because the SLF
is no longer in effect, the Board proposes to delete each of the four
provisions discussed above. As discussed in more detail in connection
with proposed [sect] 201.3(d), the Board proposes to delete a portion
of existing [sect] 201.6(d) that allows a depository institution to use
credit obtained from the SLF to fund sales of federal funds.
Section 201.1 Authority, Purpose and Scope
The Board proposes to amend the existing authority citations at
[sect] 201.1(a) to include sections 11(i)-11(j) and 14(d) of the
Federal Reserve Act. Sections 11(i)-(j) provide the Board with
rulemaking authority and general supervisory authority over the Reserve
Banks, respectively, and section 14(d) authorizes the Reserve Banks,
subject to the review and determination of the Board, to establish
discount rates.
As in the existing regulation, [sect] 201.1(b) of the proposed rule
describes the purpose and scope of the Regulation A and states that the
regulation governs lending by Reserve Banks to depository institutions
and others. To gather all the provisions concerning the scope of
Regulation A into one section, the proposed rule incorporates language
from existing [sect] 201.7(a) regarding the circumstances under which
U.S. branches and agencies of foreign banks are subject to the
regulation.
Section 201.2--Definitions
This section would remain unchanged except for the deletion of five
definitions. As discussed above, [sect][sect] 201.2(j)-(k) contain
definitions that are unnecessary because they relate only to the SLF.
The other three terms the Board proposes to delete are liquidation
loss, increased loss, and excess loss, found at existing [sect][sect]
201.2(d)-(f), respectively.
Liquidation loss and increased loss are used to derive the term
excess loss, which is the amount the Board would owe the FDIC under
section 10B(b) of the Federal Reserve Act if outstanding Reserve Bank
advances to a critically undercapitalized depository institution
increased the FDIC's cost of liquidating that institution. Excess loss,
the only one of these three terms used elsewhere in the regulation,
appears in existing [sect] 201.4(c). That section states that the Board
would assess a Reserve Bank for any excess loss attributable to
advances made by that Reserve Bank and
[[Page 36548]]
discusses the procedure by which the Board would calculate the amount
to be assessed.
The Board believes the regulation would be less cumbersome but no
less accurate if the assessment section incorporated the concept of
excess loss by simply cross-referencing section 10B(b) of the Federal
Reserve Act. Although the existing definitions explain accurately and
in detail how the Board would calculate the excess loss, they produce
the same result required by section 10B(b) of the statute.
Section 201.3 General Requirements Governing Extensions of Credit
This section would prescribe the Board's rules governing a Federal
Reserve Bank's extension of credit. This section would permit Federal
Reserve Banks to extend credit in the form of an advance or discount
and would discuss requirements that both the Reserve Banks and the
depository institutions receiving credit must observe. The text of
proposed [sect] 201.3 combines in one place all the existing provisions
of Regulation A that relate to each of these topics.
Proposed paragraph (a) of [sect] 201.3 would consolidate all the
existing provisions of Regulation A concerning a Reserve Bank's
authority to extend credit. Proposed [sect] 201.3(a) mostly contains
existing text from [sect] 201.5 and provides that a Reserve Bank may
extend credit to a depository institution in the form of an advance or
a discount of certain types of paper described in the Federal Reserve
Act. Like existing [sect] 201.5, the proposed section states that
credit to depository institutions generally will take the form of an
advance but preserves a Reserve Bank's discretion to lend through
discounting eligible paper if the Reserve Bank determines that a
discount would be more appropriate for a particular depository
institution. The proposed rule would delete existing [sect] 201.8,
which provides that a Reserve Bank may discount paper for an
institution that is part of the farm credit system, and instead would
discuss that authority at proposed [sect] 201.3(a)(3). Rather than
providing the lengthy discussion at existing [sect] 201.8, proposed
[sect] 201.3(a)(3) simply cross-references section 13A of the Federal
Reserve Act, which authorizes Reserve Banks to discount paper for such
institutions.
Proposed [sect] 201.3(b) contains the text of existing [sect]
201.9, which states that a Reserve Bank has no obligation to make,
increase, renew, or extend any advance or discount to a depository
institution.
Proposed [sect] 201.3(c) gathers in one place the existing
provisions of Regulation A concerning the requirements a Reserve Bank
must observe when it does extend credit. Section 201.3(c)(1) contains
text from existing [sect] 201.4(d) providing that a Reserve Bank should
ascertain whether an institution is undercapitalized or critically
undercapitalized before extending credit to that institution. This
section adds text stating that, if the institution is undercapitalized
or critically undercapitalized, the Reserve Bank must follow special
lending procedures. These procedures are specified in proposed [sect]
201.5, which contains the text of current [sect] 201.4 and is discussed
in more detail below.
Proposed [sect][sect] 201.3(c)(2)-(3) include text from existing
[sect][sect] 201.6(b)-(c) regarding a Reserve Bank's duty to require
any information it deems appropriate to ensure the acceptability of
assets tendered as collateral or for discount, to ensure that credit is
used consistent with Regulation A, and to keep itself informed of the
general character and amount of loans and investments of a depository
institution as required by section 4(8) of the Federal Reserve Act.
Proposed [sect] 201.3(d) consists of existing [sect] 201.6(d), with
revisions, regarding how a depository institution may use Federal
Reserve credit. In existing Regulation A, only depository institutions
that received credit under the century date change SLF were permitted
to use Federal Reserve credit to fund sales of federal funds without
permission of the Reserve Bank extending the credit. Because the SLF no
longer is in effect, the Board would delete the language that pertains
to credit obtained through that facility. Instead, as explained more
fully above in the section discussing primary credit, proposed [sect]
201.3(d) would permit an institution that receives primary credit to
use that credit to fund sales of federal funds without Reserve Bank
permission. Recipients of secondary or seasonal credit would continue
to need Reserve Bank permission to use Reserve Bank credit to fund
sales of federal funds.
The Board proposes to delete existing [sect] 201.6(a), which
provides that a depository institution may not use Federal Reserve
credit as a substitute for capital. Although the Board continues to
believe this to be an appropriate policy, the Board believes that other
provisions of the statutes and regulations that it administers address
this issue. Thus, the Board sees no need to retain this provision in
Regulation A.
Section 201.5 Limitations on Availability and Assessments
The existing text of [sect] 201.4 would be redesignated as [sect]
201.5, with technical revisions. This section incorporates the
limitations on advances to an undercapitalized or critically
undercapitalized depository institution set forth in section 10B(b) of
the Federal Reserve Act and also applies those limitations to discounts
for such institutions. In addition, [sect] 201.5 discusses section
10B(b)'s requirement that the Board pay a specified amount to the FDIC
if a Reserve Bank advance to a critically undercapitalized depository
institution increases the loss the FDIC incurs when liquidating that
institution. The existing regulation explains in detail through the
definitions of ``liquidation loss,'' ``increased loss,'' and ``excess
loss'' how the Board would calculate that amount. The proposed rule, by
contrast, would delete these three definitions and simply provide that
the Board will assess the Federal Reserve Banks for any amount the
Board pays to the FDIC in accordance with section 10B(b) of the Federal
Reserve Act.
Regulatory Flexibility Act
In accordance with section 3(a) of the Regulatory Flexibility Act
(5 U.S.C. 603(a)) the Board must publish an initial regulatory
flexibility analysis with this proposed regulation. As discussed above,
the proposed above-market discount rate structure is designed to enable
the discount window to operate more efficiently as a back-up source of
funds for individual depository institutions and as a mechanism for
implementing the policy objectives of the Federal Reserve System. By
limiting primary credit eligibility to generally sound institutions,
minimizing a Reserve Bank's need to question potential borrowers, and
making the borrowing programs more transparent, the proposal seeks to
eliminate current disincentives for depository institutions to seek
Federal Reserve credit when money markets tighten. The Board knows of
no other regulations that overlap or conflict with, or duplicate, the
proposed rule.
The proposed rule would apply to all depository institutions that
are eligible to borrow at the discount window, including approximately
16,000 small depository institutions, and would not add any
recordkeeping, reporting, or compliance requirements associated with
discount window borrowing. The requirements of the proposed rule would
be the same for all depository institutions regardless of their size.
[[Page 36549]]
However, if the Board altered the seasonal credit program in response
to public comments, small depository institutions, which are the
primary users of that program, would be affected more than larger
institutions. Because the Board estimates that fewer than 5 percent of
eligible small depository institutions typically receive seasonal
credit each year, the Board does not expect changes to or elimination
of the seasonal credit program to have a large impact in the aggregate.
The Board solicits comment on the likely impact the proposed rule
would have on depository institutions, including those that are small
business concerns. The Board particularly is interested in the public's
view on how the increase in the discount rate relative to money market
interest rates and the corresponding reduction in administrative burden
would affect depository institutions of different sizes.
Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3506; 5 CFR 1320 Appendix A.1), the Board has reviewed the proposed
rule under the authority delegated to the Board by the Office of
Management and Budget. The proposed rule contains no new collections of
information and proposes no substantive changes to existing collections
of information pursuant to the Paperwork Reduction Act.
List of Subjects in 12 CFR Part 201
Credits.
For the reasons set forth in the preamble, the Board revises part
201 of subchapter A of Chapter II, Title 12 of the Code of Federal
Regulations to read as follows:
PART 201--EXTENSIONS OF CREDIT BY FEDERAL RESERVE BANKS (REGULATION
A)
Sec.
201.1 Authority, purpose and scope.
201.2 Definitions.
201.3 Extensions of credit generally.
201.4 Availability and terms of credit.
201.5 Limitations on availability and assessments.
201.51 Interest rates applicable to credit extended by a Federal
Reserve Bank.
Authority: 12 U.S.C. 248(i)-(j), 347a, 347b, 343 et seq., 347c,
348 et seq., 357, 374, 374a, and 461.
[sect] 201.1 Authority, purpose and scope.
(a) Authority. This part is issued under the authority of sections
10A, 10B, 11(i), 11(j), 13, 13A, 14(d), and 19 of the Federal Reserve
Act (12 U.S.C. 248(i)-(j), 347a, 347b, 343 et seq., 347c, 348 et seq.,
357, 374, 374a, and 461).
(b) Purpose and scope. This part establishes rules under which a
Federal Reserve Bank may extend credit to depository institutions and
others. Except as otherwise provided, this part applies to United
States branches and agencies of foreign banks that are subject to
reserve requirements under Regulation D (12 CFR part 204) in the same
manner and to the same extent as this part applies to depository
institutions. The Federal Reserve System extends credit with due regard
to the basic objectives of monetary policy and the maintenance of a
sound and orderly financial system.
[sect] 201.2 Definitions.
For purposes of this part, the following definitions shall apply:
(a) Appropriate federal banking agency has the same meaning as in
section 3 of the Federal Deposit Insurance Act (FDI Act) (12 U.S.C.
1813(q)).
(b) Critically undercapitalized insured depository institution
means any insured depository institution as defined in section 3 of the
FDI Act (12 U.S.C. 1813(c)(2)) that is deemed to be critically
undercapitalized under section 38 of the FDI Act (12 U.S.C.
1831o(b)(1)(E)) and its implementing regulations.
(c)(1) Depository institution means an institution that maintains
reservable transaction accounts or nonpersonal time deposits and is:
(i) An insured bank as defined in section 3 of the FDI Act (12
U.S.C. 1813(h)) or a bank that is eligible to make application to
become an insured bank under section 5 of such act (12 U.S.C. 1815);
(ii) A mutual savings bank as defined in section 3 of the FDI Act
(12 U.S.C. 1813(f)) or a bank that is eligible to make application to
become an insured bank under section 5 of such act (12 U.S.C. 1815);
(iii) A savings bank as defined in section 3 of the FDI Act (12
U.S.C. 1813(g)) or a bank that is eligible to make application to
become an insured bank under section 5 of such act (12 U.S.C. 1815);
(iv) An insured credit union as defined in section 101 of the
Federal Credit Union Act (12 U.S.C. 1752(7)) or a credit union that is
eligible to make application to become an insured credit union pursuant
to section 201 of such act (12 U.S.C. 1781);
(v) A member as defined in section 2 of the Federal Home Loan Bank
Act (12 U.S.C. 1422(4)); or
(vi) A savings association as defined in section 3 of the FDI Act
(12 U.S.C. 1813(b)) that is an insured depository institution as
defined in section 3 of the act (12 U.S.C. 1813(c)(2)) or is eligible
to apply to become an insured depository institution under section 5 of
the act (12 U.S.C. 15(a)).
(2) The term ``depository institution'' does not include a
financial institution that is not required to maintain reserves under
[sect] 204.1(c)(4) of Regulation D (12 CFR 204.1(c)(4)) because it is
organized solely to do business with other financial institutions, is
owned primarily by the financial institutions with which it does
business, and does not do business with the general public.
(d) Transaction account and nonpersonal time deposit have the
meanings specified in Regulation D (12 CFR part 204).
(e) Undercapitalized insured depository institution means any
insured depository institution as defined in section 3 of the FDI Act
(12 U.S.C. 1813(c)(2)) that:
(1) Is not a critically undercapitalized insured depository
institution; and
(2)(i) Is deemed to be undercapitalized under section 38 of the FDI
Act (12 U.S.C. 1831o(b)(1)(C)) and its implementing regulations; or
(ii) Has received from its appropriate federal banking agency a
composite CAMELS rating of 5 under the Uniform Financial Institutions
Rating System (or an equivalent rating by its appropriate federal
banking agency under a comparable rating system) as of the most recent
examination of such institution.
(f) Viable, with respect to a depository institution, means that
the Board of Governors or the appropriate federal banking agency has
determined, giving due regard to the economic conditions and
circumstances in the market in which the institution operates, that the
institution is not critically undercapitalized, is not expected to
become critically undercapitalized, and is not expected to be placed in
conservatorship or receivership. Although there are a number of
criteria that may be used to determine viability, the Board of
Governors believes that ordinarily an undercapitalized insured
depository institution is viable if the appropriate federal banking
agency has accepted a capital restoration plan for the depository
institution under 12 U.S.C. 1831o(e)(2) and the depository institution
is complying with that plan.
[sect] 201.3 Extensions of credit generally.
(a) Advances to and discounts for a depository institution. (1) A
Federal Reserve Bank may lend to a depository institution either by
making an advance secured by acceptable collateral under [sect] 201.4
of this part or by discounting certain types of paper. A Federal
[[Page 36550]]
Reserve Bank generally extends credit by making an advance.
(2) An advance to a depository institution must be secured to the
satisfaction of the Federal Reserve Bank that makes the advance.
Satisfactory collateral generally includes United States government and
federal-agency securities, and, if of acceptable quality, mortgage
notes covering one-to four-family residences, state and local
government securities, and business, consumer, and other customer
notes.
(3) If a Federal Reserve Bank concludes that a discount would meet
the needs of a depository institution or an institution described in
section 13A of the Federal Reserve Act (12 U.S.C. 349) more
effectively, the Reserve Bank may discount any paper indorsed by the
institution, provided the paper meets the requirements specified in the
Federal Reserve Act.
(b) No obligation to make advances or discounts. A Federal Reserve
Bank shall have no obligation to make, increase, renew, or extend any
advance or discount to any depository institution.
(c) Information requirements. (1) Before extending credit to a
depository institution, a Federal Reserve Bank should determine if the
institution is an undercapitalized insured depository institution or a
critically undercapitalized insured depository institution and, if so,
follow the lending procedures specified in [sect] 201.5.
(2) Each Federal Reserve Bank shall require any information it
believes appropriate or desirable to ensure that assets tendered as
collateral for advances or for discount are acceptable and that the
borrower uses the credit provided in a manner consistent with this
part.
(3) Each Federal Reserve Bank shall:
(i) Keep itself informed of the general character and amount of the
loans and investments of a depository institution as provided in
section 4(8) of the Federal Reserve Act (12 U.S.C. 301); and
(ii) Consider such information in determining whether to extend
credit.
(d) Indirect credit for others. Except for depository institutions
that receive primary credit as described in [sect] 201.4(a), no
depository institution shall act as the medium or agent of another
depository institution in receiving Federal Reserve credit except with
the permission of the Federal Reserve Bank extending credit.
[sect] 201.4 Availability and terms of credit.
(a) Primary credit. A Federal Reserve Bank may extend primary
credit on a very short-term basis, usually overnight, to a depository
institution that is in generally sound condition in the judgment of the
Reserve Bank. Such primary credit ordinarily is extended with minimal
administrative burden on the borrowing institution. A Federal Reserve
Bank also may extend primary credit with maturities up to a few weeks
to a depository institution if the Reserve Bank determines that the
institution is in generally sound condition and that the institution
cannot obtain such credit in the market on reasonable terms. Credit
extended under the primary credit program is granted at the primary
discount rate.
(b) Secondary credit. A Federal Reserve Bank may extend secondary
credit to meet temporary funding needs of a depository institution that
is not eligible for primary credit if, in the judgment of the Reserve
Bank, such a credit extension would be consistent with the
institution's timely return to a reliance on market funding sources. A
Reserve Bank also may extend secondary credit if the Reserve Bank
determines that such credit would facilitate the orderly resolution of
serious financial difficulties of a depository institution. Credit
extended under the secondary credit program is granted at a rate above
the primary discount rate.
(c) Seasonal credit. A Federal Reserve Bank may extend seasonal
credit for periods longer than those permitted under primary credit to
assist a smaller depository institution in meeting regular needs for
funds arising from expected patterns of movement in its deposits and
loans. An interest rate that varies with the level of short-term market
interest rates is applied to seasonal credit.
(1) A Federal Reserve Bank may extend seasonal credit only if:
(i) The depository institution's seasonal needs exceed a threshold
that the institution is expected to meet from other sources of
liquidity (this threshold is calculated as a certain percentage,
established by the Board of Governors, of the institution's average
total deposits in the preceding calendar year); and
(ii) The Federal Reserve Bank is satisfied that the institution's
qualifying need for funds is seasonal and will persist for at least
four weeks.
(2) The Board may establish special terms for seasonal credit when
depository institutions are experiencing unusual seasonal demands for
credit in a period of liquidity strain.
(d) Emergency credit for others. In unusual and exigent
circumstances and after consultation with the Board of Governors, a
Federal Reserve Bank may extend credit to an individual, partnership,
or corporation that is not a depository institution if, in the judgment
of the Federal Reserve Bank, credit is not available from other sources
and failure to obtain such credit would adversely affect the economy.
If the collateral used to secure emergency credit consists of assets
other than obligations of, or fully guaranteed as to principal and
interest by, the United States or an agency thereof, credit must be in
the form of a discount and five or more members of the Board of
Governors must affirmatively vote to authorize the discount prior to
the extension of credit. Emergency credit will be extended at a rate
above the highest rate in effect for advances to depository
institutions.
[sect] 201.5 Limitations on availability and assessments.
(a) Lending to undercapitalized insured depository institutions. A
Federal Reserve Bank may make or have outstanding advances to or
discounts for a depository institution that it knows to be an
undercapitalized insured depository institution, only:
(1) If, in any 120-day period, advances or discounts from any
Federal Reserve Bank to that depository institution are not outstanding
for more than 60 days during which the institution is an
undercapitalized insured depository institution; or
(2) During the 60 calendar days after the receipt of a written
certification from the chairman of the Board of Governors or the head
of the appropriate federal banking agency that the borrowing depository
institution is viable; or
(3) After consultation with the Board of Governors. In unusual
circumstances, when prior consultation with the Board is not possible,
a Federal Reserve Bank should consult with the Board as soon as
possible after extending credit that requires consultation under this
paragraph (a).
(b) Lending to critically undercapitalized insured depository
institutions. A Federal Reserve Bank may make or have outstanding
advances to or discounts for a depository institution that it knows to
be a critically undercapitalized insured depository institution only:
(1) During the 5-day period beginning on the date the institution
became a critically undercapitalized insured depository institution; or
(2) After consultation with the Board of Governors. In unusual
circumstances, when prior consultation with the Board is not possible,
a Federal Reserve Bank should consult with the Board as soon as
possible after extending credit that requires consultation under this
paragraph (b).
[[Page 36551]]
(c) Assessments. The Board of Governors will assess the Federal
Reserve Banks for any amount that the Board pays to the FDIC due to any
excess loss in accordance with section 10B(b) of the Federal Reserve
Act (12 U.S.C. 347b(b)). Each Federal Reserve Bank shall be assessed
that portion of the amount that the Board of Governors pays to the FDIC
that is attributable to an extension of credit by that Federal Reserve
Bank, up to 1 percent of its capital as reported at the beginning of
the calendar year in which the assessment is made. The Board of
Governors will assess all of the Federal Reserve Banks for the
remainder of the amount it pays to the FDIC in the ratio that the
capital of each Federal Reserve Bank bears to the total capital of all
Federal Reserve Banks at the beginning of the calendar year in which
the assessment is made, provided, however, that if any assessment
exceeds 50 percent of the total capital and surplus of all Federal
Reserve Banks, whether to distribute the excess over such 50 percent
shall be made at the discretion of the Board of Governors.
[sect] 201.51 Interest rates applicable to credit extended by a
Federal Reserve Bank.
(a) Primary credit. The rates for primary credit provided to
depository institutions under [sect] 201.4(a) are: [The chart will
appear in the final rule.]
(b) Secondary credit. An interest rate 50 basis points above the
rate for primary credit in [sect] 201.51 will apply to secondary credit
extended to depository institutions under [sect] 201.4(c).
(c) Seasonal credit. The rate for seasonal credit extended to
depository institutions under [sect] 201.4(b) is a flexible rate that
takes into account rates on market sources of funds.
By order of the Board of Governors of the Federal Reserve
System, May 16, 2002.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 02-12781 Filed 5-23-02; 8:45 am]
BILLING CODE 6210-01-P