[Federal Register: November 7, 2002 (Volume 67, Number 216)]
[Rules and Regulations]
[Page 67777-67787]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07no02-2]
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FEDERAL RESERVE SYSTEM
12 CFR Parts 201 and 204
[Regulations A and D; Docket Nos. R-1123 and R-1134]
Extensions of Credit by Federal Reserve Banks; Reserve
Requirements of Depository Institutions
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Final rule; technical amendment.
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SUMMARY: The Board of Governors is publishing final amendments to
[[Page 67778]]
Regulation A that replace the existing adjustment and extended credit
programs with programs called primary and secondary credit and also
reorganize and streamline existing provisions of Regulation A. The
final rule leaves the existing seasonal credit program essentially
unchanged. The final rule is intended to improve the functioning of the
discount window and does not indicate a change in the stance of
monetary policy.
The Board also is amending the penalty provision of Regulation D,
which is calculated based on the discount rate, to conform the
calculation of penalties for reserve deficiencies to the new discount
rate framework.
DATES: This final rule will become effective on January 9, 2003.
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, Counsel (202/452-3554), Legal
Division; for users of Telecommunication Devices for the Deaf (TDD)
only, contact 202/263-4869.
SUPPLEMENTARY INFORMATION:
Background
Existing Regulation A and the Board's Proposed Rule
Under existing Regulation A, three credit programs are available to
depository institutions: (1) Adjustment credit, which is available for
short periods of time, usually overnight, when a depository institution
has exhausted other sources of funds; (2) extended credit, which is
available for somewhat longer periods when assistance is not available
from other sources; and (3) seasonal credit, which is available largely
to small banks with a pronounced seasonal funding need. Over the past
decade, the interest rate on adjustment credit has been 25 to 50 basis
points below the federal funds rate, which is the rate that applies to
uncollateralized overnight loans in the interbank market. The rates for
extended and seasonal credit are set by formulas based on market
interest rates and typically have been at or above the basic discount
rate.
The below-market rate for adjustment credit creates incentives for
an institution to borrow at the discount window to exploit the spread
between the discount rate and the higher market rate for short-term
funds. The current regulation therefore requires that an institution
first exhaust other available sources of funds and explain its need for
adjustment credit. The regulation also prohibits the use of discount
window credit to finance the sale of federal funds. Because of these
restrictions, a Reserve Bank must evaluate the financial situation of
each borrower to determine that both the reason for borrowing at the
discount window and the depository institution's use of borrowed funds
are appropriate.
Reserve Bank administration of adjustment credit tends to create
uncertainty among depository institutions about their access to
discount window credit. In addition, institutions that have borrowed at
the discount window after advertising their need for funds in the
market have expressed concern that borrowing at the window signals
weakness and is a source of stigma. Concerns such as these in some
cases have deterred depository institutions from borrowing at the
discount window during very tight money markets when doing so would
have been appropriate. This in turn has hampered the ability of the
discount window to buffer shocks to the money markets.
To improve the operation of the discount window, the Board proposed
to replace the existing adjustment and extended credit programs with
primary and secondary credit programs (67 FR 36544, May 24, 2002). The
Board proposed that primary credit be available to generally sound
institutions on a very short-term basis, usually overnight, with little
or no administrative burden on the borrower and that borrowers of
primary credit not be required to exhaust other sources of funds before
obtaining short-term primary credit. The Board also proposed that
primary credit be available for periods of up to a few weeks to
generally sound institutions that cannot reasonably obtain such funding
in the market. The Board proposed no restrictions on the purposes for
which the borrower could use primary credit. The proposal contemplated
that Reserve Banks would establish a System-wide set of criteria, based
on supervisory and other relevant information, which would be used to
determine whether an institution was in generally sound financial
condition and thus eligible for primary credit. The Board proposed that
primary credit normally be available at a rate above the target federal
funds rate of the Federal Open Market Committee (FOMC) and that the
initial primary credit rate be 100 basis points above the target
federal funds rate.
Under the proposed rule, institutions not eligible for primary
credit would be permitted to borrow secondary credit to meet temporary
funding needs, consistent with the institution's timely return to a
reliance on market funds. A Reserve Bank also could extend secondary
credit to facilitate the resolution of serious financial difficulties
of an institution. The Board proposed that the initial rate be set by
formula 50 basis points above the primary credit rate. The Board's
proposal contemplated that the secondary credit program would require
more Reserve Bank administration than the primary credit program.
The proposed regulation retained the existing seasonal credit
program without substantive change, although the Board specifically
requested comment regarding whether that program was still necessary
and, if so, what the applicable interest rate should be.
Overview of Comments Received
The Board received 61 comments on the proposed rule from depository
institutions of various sizes, trade associations that represent
depository institutions, individuals, and Reserve Banks. This section
presents an overview of the main points contained in the comments
received. The section-by-section analysis of the final rule, set forth
below, discusses the comments in greater detail and responds to the
major concerns expressed by commenters.
Support for the Proposal
Of the 30 letters that addressed the primary and secondary credit
programs, approximately 14 generally supported moving to an above-
market discount window framework. These commenters indicated that
replacing the existing below-market discount window facility with an
above-market framework would provide more easily accessible funding on
more predictable and transparent terms with less burden on borrowers
and would remove incentives to borrow in order to exploit interest rate
spreads. Owing to the removal of the requirements that a borrower
exhaust other funding sources and prove its need for credit and the
addition of the requirement that primary credit borrowers be in
generally sound financial condition, some supporters of the proposal
thought that the stigma associated with discount borrowing would
decrease. Commenters also indicated that an above-market framework
would provide depository institutions with an incentive to manage their
liquidity more prudently under normal market conditions in order to
avoid paying the penalty rate but would make it easier for banks to
obtain overnight funding during periods of very tight money markets.
Supporters
[[Page 67779]]
also stated that an above-market lending facility would be more akin to
the lending facilities of other central banks.
Questions About the Need for Proposed Changes
Some commenters questioned the underlying reasons the Board gave
for proposing an above-market framework. Several commenters questioned
the Board's statement that some depository institutions were deterred
from coming to the discount window because of perceptions that discount
window borrowing indicated financial weakness. One commenter asserted
that, because of limits on lending to undercapitalized institutions,
borrowing at the window was more likely to indicate strength than
weakness, while others asserted that market participants did not view
borrowing as an important factor when assessing financial strength.\1\
Still another commenter argued that the current low volume of borrowing
did not indicate reluctance to borrow, but rather indicated that
depository institutions were using the window appropriately as a backup
rather than primary source of liquidity.\2\ Other commenters questioned
the need for an above-market rate for purposes of limiting volatility
in the federal funds market because they thought that the existing
controls and incentives adequately limited volatility.
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\1\ One commenter argued that the manner in which discount
window borrowing is reported makes it difficult to identify
individual borrowers. Others thought that discount window activity
was at best a secondary indicator of financial strength because
market participants rely on other sources when determining an
institution's soundness.
\2\ The Board believes that a number of factors, including
improved account management by depository institutions, contribute
to the relatively low level of borrowing at recent spreads of the
federal funds rate over the discount rate. However, the Board also
believes that the current framework of below-market lending, with
its attendant need to administer lending heavily, remains a
potential deterrent to appropriate borrowing, especially during
periods when the overall condition of the financial sector is weak.
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Concerns About the Proposal
Sixteen commenters, eight of whom opposed the proposal, expressed
various concerns about the proposal. Commenters' concerns focused
mainly on the proposed 100-basis-point spread between the target
federal funds and primary credit rates. Other commenters expressed
concern that lending funds at an above-market rate inappropriately
would introduce a profit motive into actions related to monetary
policy, thereby creating a conflict of interest for the Federal Reserve
System.\3\
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\3\ Another commenter argued that if a depository institution
were to deteriorate as a result of reselling funds obtained through
the primary credit program, the public might blame the Federal
Reserve.
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Many commenters expressed concern that the proposal either would
not address or would exacerbate the problems that the Board identified
as reasons for changing to an above-market framework. Although some
critics of the proposal thought that the new framework would prevent
extreme spikes in the federal funds rate, many commenters thought that
volatility, especially intraday volatility, would increase rather than
decrease. Other commenters thought that depository institutions would
be at least as reluctant as they are currently to seek discount window
credit because stigma would remain or because the above-market rate
would deter borrowing. Still other commenters asserted that the Board's
proposal would not be less burdensome for borrowers. Suggested
Alternatives to and Suggestions Regarding the Board's Proposal.
Some commenters who expressed general concern about the proposed
above-market structure suggested that the Board modify or consider
alternatives to its proposal. One commenter suggested that the problems
with the current discount window programs were not burden and stigma,
but rather were uncertainty about the programs and inconsistent
requirements and expectations throughout the System. This commenter
suggested leaving the current discount window programs in place but
clarifying the Reserve Banks' credit policies, expectations, and
requirements and applying those criteria more consistently throughout
the Federal Reserve System.\4\ Another commenter proposed that the
Board try to cap the federal funds rate through late-day open market
operations rather than change its credit programs. Other commenters
thought that the Federal Reserve should make credit available
continuously and at market rates.\5\ Comments Regarding Seasonal
Credit.
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\4\ The Board notes that the Federal Reserve System has taken
steps over the past decade that have been intended to clarify
requirements and decrease stigma.
\5\ The Board notes that this approach would be inconsistent
with operation of primary and secondary credit facilities as backup
sources of liquidity and reserves for depository institutions.
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Over half the comments the Board received were in response to the
Board's solicitation for comment about the continued need for the
seasonal credit program. Forty-five commenters addressed the seasonal
credit program, with 39 in favor of retaining and six in favor of
eliminating the program. These comments are discussed in detail below
in the section on seasonal credit.
Summary of Final Rule
For the reasons discussed in detail below in the section-by-section
analysis, the Board's final amendments to Regulation A substantively
are nearly identical to the rule the Board proposed in May 2002. Most
notably, the final rule replaces the existing adjustment and extended
credit programs with primary and secondary credit programs, and the
Reserve Banks will offer these new types of credit at rates that exceed
the FOMC's target federal funds rate. The Board has included in the
final rule a section under which the primary credit rate could be
lowered in a financial emergency in the absence of a quorum of the
Board. The Board is retaining the seasonal credit program with only
minor technical changes.
Section-by-Section Analysis
The Above-Market Lending Framework--Sec. Sec. 201.4 and 201.51.
The Above Market Framework Generally and Market Volatility
A number of commenters argued that moving to an above-market
discount window framework generally would increase volatility,
especially in light of the proposed 100-basis-point initial spread of
the primary credit rate over the target federal funds rate, and
therefore would not accomplish one of the Board's stated goals.\6\
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\6\ These commenters generally thought that an above-market
structure would allow sellers routinely to increase the federal
funds rate all the way up to the ceiling established by the discount
rate, thereby increasing the cost of funds generally.
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It is possible that certain measures of volatility of the federal
funds rate--particularly those that give some weight to small
deviations from the target, such as the intraday standard deviation of
the federal funds rate--will increase under the above-market framework.
However, the Board believes that an above-market framework will reduce
the potential for more extreme, unintended movements in the funds rate.
These extreme movements arguably are more problematic than smaller ones
because they tend to occur in the context of, and can exacerbate,
conditions of market stress. Most depository institutions will not have
an incentive to borrow from the window until the federal funds rate
rises to the primary credit rate, at which point institutions likely
will view the window as an attractive alternative. The presence of the
discount window as a funding option should ensure that the federal
funds rate will not rise significantly above the primary credit
[[Page 67780]]
rate, so the primary credit rate effectively will serve as a cap on and
limit potential volatility in the federal funds rate.
Some commenters stated that an above-market discount window
framework would place an upper limit on the federal funds rate but
argued that the Board should not establish a ceiling on the federal
funds rate without also establishing a floor, noting that net sellers
of federal funds are disadvantaged by declines in the federal funds
rate. The most effective means of establishing a floor would be for the
Federal Reserve to pay interest on excess reserve account balances,
because a depository institution would have no incentive to lend or
sell reserves at a lower rate than the rate of interest those reserve
balances could earn. However, the Federal Reserve does not have
explicit statutory authority to pay interest on reserve balances at
this time.
Although it might be desirable to limit both upward and downward
volatility, those limits need not be implemented simultaneously in
order to produce beneficial results. The potential advantages of the
proposed discount window changes are considerable even in the absence
of a rate floor, and delaying implementation of the above-market
framework would unnecessarily defer those advantages without any
countervailing benefit. The Board therefore has determined that
implementation of the above-market framework should proceed without
delay.
Primary Credit
Reserve Banks will extend primary credit at a rate above the target
federal funds rate on a very short-term basis (typically overnight) to
depository institutions that the Reserve Banks judge to be in generally
sound financial condition. Reserve Banks will determine eligibility for
primary credit according to a set of criteria that is uniform
throughout the Federal Reserve System and based mainly on examination
ratings and capitalization, although supplementary information,
including market-based information when available, also could be used.
An institution that is eligible to receive primary credit need not
exhaust other sources of funds before coming to the discount window,
nor will it be prohibited from using primary credit to finance sales of
federal funds. However, in view of the above-market price of primary
credit, the Board expects that a depository institution will continue
to use the discount window as a backup source of liquidity, which is
the intended purpose of a central bank lending facility, rather than as
a routine one. Reserve Banks will extend primary credit on an overnight
basis with minimal administrative requirements, unless an aspect of the
request for funds suggests that the credit extension would not meet the
conditions of primary credit. Reserve Banks also may extend primary
credit to eligible institutions for periods of up to several weeks if
such funding is not available from other sources. However, longer-term
extensions of primary credit will be subject to greater administration
than are overnight loans. The text of Sec. 201.4(a) is essentially the
same as that of the Board's proposal, although the final rule includes
language highlighting the backup nature of the primary credit facility.
1. Interest Rates for Primary Credit
Several commenters supported the Board's proposal that the initial
primary credit rate be 100 basis points above the target federal funds
rate. These commenters thought that a 100-basis-point spread generally
was appropriate and would encourage most financial institutions first
to seek credit elsewhere. One commenter thought the proposed spread was
acceptable because the Federal Reserve does a good job of keeping the
federal funds rate near the target.
The Board received numerous comments, however, that expressed
specific concern about the proposed initial primary credit rate. Many
commenters, even those that generally supported the proposal, argued
that the 100-basis-point spread the Board proposed was too wide and
would undermine the Board's articulated goals for the primary credit
program. These commenters thought that a discount rate of the target
federal rate plus 100 basis points was too high because it was overly
punitive, would deter institutions from borrowing at the discount
window, and would allow sellers of federal funds to bid the federal
funds rate up during periods of limited trading, low reserve volume, or
late-day trading. Other commenters thought that a 100-basis-point
spread between the target federal funds and discount rates would thwart
the Board's efforts to remove the stigma associated with discount
window borrowing and to encourage depository institutions and industry
analysts to view the window as a normal liquidity source for sound
institutions.
Several commenters liked the idea of setting the primary credit
rate at rate above the target federal funds rate but suggested that a
spread of as few as 25 to as many as 50 basis points would be
preferable to the 100-basis-point initial spread the Board proposed.\7\
Other commenters suggested alternative mechanisms for setting the rate,
such as setting the rate at a certain percentage, rather than a certain
number of basis points, above the target federal funds rate.\8\
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\7\ Although most commenters who suggested a particular rate did
not explain their rationale, one commenter argued that a 50-basis-
point spread would be appropriate because the commenter asserted
that approximately half the large spikes in the federal funds rate
were at about that level. Another commenter indicated that a 50- to
60-basis-point spread would be appropriate because that would ensure
that the central bank rate was slightly higher than the market rate
but would keep the market rate from becoming excessive.
\8\ One of these commenters suggested that the amount of the
spread should depend on the level of the target federal funds rate,
such that the lower the federal funds rate, the lower the spread and
vice versa. Another suggested tying the primary credit rate to the
collateralized repo rate rather than the federal funds rate.
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The Board notes that an appreciable spread between the primary
credit and target federal funds rate is necessary for the success of
the above-market discount window programs. Given the large number of
financial institutions in the United States and the tremendous
variation in their sizes and other characteristics, the availability
and price of market funding sources available to U.S. financial
institutions also vary widely. If the primary credit rate were not at
least as high as the highest rate on sources of comparable funding in
the market, then some depository institutions frequently would find the
primary credit program, rather than the open market, to be the most
attractive source of funds. If routine use of the window occurred, the
Federal Reserve still would need to administer the discount window
heavily to deter institutions from making undue use of primary credit.
Although it is difficult to determine the appropriate rate at which
to extend primary credit to ensure that it remains a backup funding
source, empirical evidence from several sources suggests that 100
points above the target federal funds rate is an appropriate initial
rate. These data cast doubt on whether a lesser spread would accomplish
this goal of ensuring that the discount window remains a backup source
of liquidity.
Experience with the Special Liquidity Facility (SLF) that the
Federal Reserve System established to address unusual liquidity strains
that arose during the months surrounding the date change on January 1,
2000, is instructive. The SLF was similar to the primary credit program
in many ways because
[[Page 67781]]
eligibility was limited to financially sound institutions,
administration of the facility intentionally was quite limited, and
funding was available at a fixed spread of 150 basis points above the
federal funds rate. Despite the penalty rate, there were 42 instances
in which institutions borrowed from the SLF for a period of two to ten
consecutive days and 14 instances in which institutions borrowed for
periods of more than ten consecutive days. This suggests that the SLF
was an attractive source of longer-term, rather than overnight, funding
for some institutions despite the 150-basis-point spread above market
rates, which in turn suggests that those financially sound institutions
might not have had access to cheaper funding in the open market.
In addition, Federal Reserve staff conversations with
representatives of correspondent banks and other depository
institutions found that the overnight funding options for banks without
access to the national money markets were priced from \3/16\ to 1
percentage point over the federal funds rate, with the largest spread
being charged by an institution that preferred that its customers first
exhaust other sources of short-term funding.
Moreover, a spread on the order of 100 basis points has been used
by some, but not all, foreign central banks on their Lombard discount
window facilities. Perhaps most notably, the European Central Bank
generally has employed a spread of 100 basis points. Conversations with
staff of some of these central banks indicate that the experience with
spreads of this size generally has been positive and has been
consistent with achieving those central banks' goals.
In view of the foregoing evidence, the Board believes that an
initial spread of 100 basis points is appropriate and anticipates that
a primary credit rate consistent with such a spread will be established
as of January 9, 2003. The Board notes, however, that this is only the
initial rate. The Reserve Banks are required to establish the primary
credit rate, subject to the review and determination of the Board, at
least every two weeks or more often if the Board deems necessary. The
System therefore can set a primary credit rate at a lesser, or greater,
spread above the federal funds rate as needed in light of actual
experience with the primary credit program.\9\
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\9\ One commenter expressed concern that the Reserve Banks would
establish and the Board determine the spread between the federal
funds and primary credit rates, rather than setting the actual rate.
The Board notes that the primary credit rate will not be determined
by establishing a fixed spread above the federal funds rate or by
using any other formula. Rather, the Reserve Banks will establish
the actual primary credit rate, subject to the review and
determination of the Board.
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Because a change in the stance of monetary policy between now and
the recommended initiation of the new programs on January 9, 2003,
cannot be ruled out, it is uncertain at this point what level of the
primary credit rate will correspond with a spread of 100 basis points
on that date. Section 201.51(a), which describes the primary credit
rate, therefore at this time simply will state that the primary credit
rate is a rate above the target federal funds rate of the FOMC. When
the Reserve Banks establish and the Board determines the rate to be in
effect on January 9, 2003, the Board will amend Sec. 201.51(a) to
indicate the initial primary credit rate for each Reserve Bank. The
Board's amendment will be effective on January 9, 2003.
2. Eligibility Criteria
The Board proposed that eligibility for primary credit be
determined mainly by a depository institution's supervisory ratings and
capitalization, although supplementary information, when available,
also could be used. Under the Board's proposed rule, institutions that
were rated CAMELS 1 or 2 or SOSA 1 and at least adequately capitalized
almost certainly would be eligible for primary credit, while
institutions rated CAMELS 4 or 5 almost certainly would not be
eligible. Institutions rated CAMELS 3 or SOSA 2 that are at least
adequately capitalized might be eligible, depending on supplementary
information.\10\ The Board noted that this recommendation aligned very
closely with the categorization of institutions for purposes of
determining access to daylight credit.
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\10\ CAMELS (Capital, Assets, Management, Earnings, Liquidity,
and Sensitivity to market risk) ratings, applicable to domestically
chartered institutions, are set on a scale of 1 through 5, with 5
representing the highest degree of supervisory concern. SOSA
(Strength of Support Assessment) ratings, applicable to foreign
banking organizations, are set on a scale of 1 through 3, with 3
indicating the highest degree of supervisory concern.
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Several commenters specifically addressed the eligibility criteria
for primary credit. Most of these commenters thought that the proposed
criteria generally were appropriate, although some suggested changes.
Several commenters argued that the criteria should rely more heavily on
examination ratings and minimize reliance on other types of information
in determining eligibility for primary credit. One commenter thought
that the guidelines would be more clear, concise, and uniform if the
Federal Reserve only took supervisory ratings into account and did not
allow supplementary information if a depository institutions were rated
CAMELS 1 or 2.\11\ Another commenter suggested that institutions that
are rated CAMELS 5 or that are critically undercapitalized either
should be precluded from obtaining credit or should be charged a much
higher penalty rate than the Board proposed. In contrast, other
commenters expressed concern that the proposed eligibility criteria
relied too heavily on supervisory data. These commenters expressed
concern that reliance on an institution's soundness was not appropriate
in a system of secured lending and suggested that the Federal Reserve
instead should base its lending programs and credit decisions on the
type of collateral an institution offers.
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\11\ This commenter argued that the other information the Board
proposed to take into account was irrelevant to a Reserve Bank's
risk regarding secured overnight loans and that considering such
information would lead to uncertainty about borrowing privileges.
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The Board believes that, in order to ensure uniformity of credit
eligibility throughout the Federal Reserve System, the criteria must
rely heavily on objective supervisory data, which reflect
determinations made by an institution's primary regulator after an
extensive review process. However, the Board also recognizes that an
institution could experience significant changes in its financial
strength between examinations, in which case the institution's
supervisory ratings might not reflect its current soundness and
creditworthiness. To protect the Reserve Banks from the risks and to
avoid the allocative distortions that could be involved in lending to
such an institution, the Board believes that the eligibility criteria
must allow for the use of some amount of supplementary information,
including market-based information when available, to confirm that an
institution's most recent supervisory data accurately reflect the
institution's current condition.
Under the final rule, the Board anticipates that the Reserve Banks
will initially adopt criteria that are substantially similar to those
articulated in the Board's proposal with some additional elements that
will make the eligibility criteria identical to those for daylight
credit. The classification scheme used by Reserve Banks for determining
access to daylight credit is well developed and provides a good measure
of the general soundness of depository institutions. Reserve Banks and
depository institutions already have extensive experience with these
criteria,
[[Page 67782]]
and using them to determine eligibility for both the daylight credit
and primary credit programs generally should be straightforward for the
Reserve Banks and should be more transparent for borrowers. Using a
single set of criteria for both programs also should simplify
explanations of Reserve Bank credit programs to depository institutions
and the public.
Under the criteria that would be applied at the outset of the
program, institutions' eligibility would be based on CAMELS (or SOSA
and ROCA) ratings, capitalization, and, at the Reserve Bank's
discretion, supplementary information.\12\ More specifically,
institutions that are at least adequately capitalized and rated CAMELS
1 or 2 (or SOSA 1 and ROCA 1, 2, or 3) would almost certainly be
eligible for primary credit. Institutions that are at least adequately
capitalized and rated CAMELS 3 (or SOSA 2 and ROCA 1, 2, or 3)
generally would be eligible. Institutions that are at least adequately
capitalized and rated CAMELS 4 (or SOSA 1 or 2 and ROCA 4 or 5) would
be eligible only if an ongoing examination indicated a substantial
improvement in condition. Institutions that are not at least adequately
capitalized, or that are rated CAMELS 5 (or SOSA 3 regardless of the
ROCA rating), would not be eligible for daylight or primary credit.
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\12\ ROCA (Risk management, Operation controls, Compliance, and
Asset quality) ratings apply to the U.S. operations of a foreign
banking organization. They are set on a scale of 1 to 5; as with
CAMELS ratings, higher numbers indicate increased supervisory
concern.
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In summary, eligibility for primary credit will be restricted to
institutions that are in generally sound financial condition. The
Reserve Banks will be responsible for determining the general soundness
of the institutions in their districts. At the outset of the program,
the Reserve Banks will use the criteria that are already used for
determining eligibility for daylight credit.
3. Reduction of Burden and Stigma
Some commenters disagreed that the proposed revisions would reduce
the stigma of borrowing at the discount window and in particular noted
that analysts and counterparties might infer that the bank could not
obtain funds at market rates and therefore might be in financial
difficulty if there were evidence that the bank were paying a premium
for funds. \13\
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\13\ Several commenters thought that stigma would remain until
senior bank management, equity analysts, investors, rating agencies,
and other market participants consider the discount window to be a
``normal'' source of liquidity. Some of these commenters suggested
that only an intensive education campaign by the Federal Reserve
targeted at those whose opinions influence perception of the
discount window would achieve this result. Other commenters thought
that financially sound institutions would not borrow at the window
because the market would not be able to tell whether they obtained
primary or secondary credit.
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The Board believes that the Federal Reserve can reasonably expect
to achieve, over time, some reduction in stigma as a result of the
primary credit program. Only generally sound institutions will be
eligible to borrow primary credit, and the Board expects that most
institutions will be eligible for primary credit. Market participants
would have no reasonable basis for inferring that an institution
believed to have borrowed primary credit was unsound.\14\ Also, with
credit no longer offered at a subsidy rate, the Federal Reserve will no
longer require a borrowing institution first to exhaust other funding
sources. As a result, borrowers will not have to make their funding
needs known to the market, which should eliminate a key source of
stigma cited by depository institutions. Depository institutions and
persons attempting to assess the strength of those institutions also
should have no concerns that financial regulators will view occasional
use of primary credit as a potential indication of difficulties. In
addition, the borrowings of those institutions that are believed to be
lending the proceeds of discount window credit into the federal funds
market clearly will indicate nothing adverse about their financial
condition. Finally, reflecting the incentives created by an above-
market framework, a significant proportion of primary credit borrowing
is likely to occur when the overall money market has tightened
significantly. Because occasions of tightening markets are well known
to all money market participants and analysts, it will be easy for them
to recognize that borrowing at such times reflects a general market
situation rather than conditions particular to a single institution.
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\14\ Although the Federal Reserve System does not publish
information on individual banks' use of the discount window, it is
required by law to publish a weekly balance sheet for each Reserve
Bank. The Federal Reserve also publishes weekly data on the
aggregate amount the Federal Reserve System has lent under each
discount window program.
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Secondary Credit
The Reserve Banks will offer secondary credit to institutions that
do not qualify for primary credit. As with primary credit, secondary
credit will be available as a backup source of liquidity on a very
short-term basis, provided that the loan is consistent with a timely
return to a reliance on market sources of funds. Longer-term secondary
credit would be available if necessary for the orderly resolution of a
troubled institution, although any such loan would have to comply with
the limitations of Sec. 201.5 regarding lending to undercapitalized
and critically undercapitalized institutions. Unlike the primary credit
program, secondary credit will not be a minimal administration facility
because the Reserve Banks will need to obtain sufficient information
about a borrower's financial situation to ensure that an extension of
credit complies with the conditions of the program. The description of
secondary credit at Sec. 201.4(b) closely tracks the language of the
Board's proposed rule but states that short-term secondary credit is a
backup funding source.
The rate for secondary credit will be set by formula and will be
above the primary credit rate. Initially, the spread between the
primary and secondary credit rates will be 50 basis points.\15\ Less
sound borrowers are riskier and might have an incentive to use discount
window borrowings to expand their balance sheets in a manner that
likely would distort resource allocation, and the higher rate on
secondary credit is designed to reduce this incentive. Even with the
higher rate, some institutions might tend to rely routinely on
secondary credit, so administration of secondary credit remains
necessary. If experience eventually suggests that a 50-basis-point
spread above the primary credit rate is either too high or too low to
achieve the objectives of the secondary credit program, the Federal
Reserve could adopt a different formula.
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\15\ Although the Board received few comments specifically about
the secondary credit program, those commenters that did reference
the program generally thought that the proposed rate of 50 basis
points above the primary credit rate was appropriate. However, one
commenter suggested that a higher secondary credit rate should not
reflect a risk premium, because all secondary credit would be
collateralized fully. This commenter suggested that the higher rate
was justified only by its ``incentive effect.'' Presumably this
commenter was referring to the incentive a higher rate provides to
less-sound institutions not to use discount window funding to expand
their balance sheets inappropriately.
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Seasonal Credit
The Board's proposed rule left the seasonal credit intact with two
technical revisions. The Board proposed removing the requirement that a
potential borrower first demonstrate that it has exhausted special
industry lenders as a funding source, because in practice the Reserve
Banks have not used this criterion for some time. In addition, the
Board proposed eliminating the requirement that the seasonal credit
rate
[[Page 67783]]
be at or above the basic discount rate, because that requirement would
not be consistent with the pricing of primary credit. The Board
specifically solicited comment on whether the seasonal credit program
is still needed and, if so, whether the current formula for determining
the rate remains appropriate. The majority of the comments that the
Board received responded to this request.
Six commenters favored eliminating the seasonal credit program,
arguing that small banks with seasonal needs had adequate access to
other sources of liquidity and that the seasonal credit program was
unnecessary. These commenters thought that the proposed primary and
secondary credit programs could meet the needs of small banks. One
commenter indicated that, if the Board kept the seasonal credit
program, it should be available only to banks with less than $100
million in assets.
The Board received 39 comments from depository institutions, trade
associations that represent small banks, and a Federal Reserve Bank
urging the Board to retain the seasonal credit program, and most of
these commenters also recommended retaining the existing rate
formula.\16\ The depository institutions argued that they continue to
experience seasonal demand for which they have relatively few
alternative funding sources. Some commenters indicated that they have
no or very limited access to short-term capital markets and national
money markets or that they can obtain credit through these channels
only on unfavorable terms. Some small banks stated that they did not
have access to the Federal Home Loan Banks (FHLBs), and some commenters
with FHLB access stated that FHLB loans are for longer terms than
needed to meet seasonal demand. Although many small banks indicated
that their deposits generally have increased because of the recent
decline in the equity markets, they expected that the availability of
deposit funding would decrease as other investment options became more
attractive. Some depository institutions also stated that obtaining
liquidity by competing for additional deposits either was too expensive
or was impossible because of a lack of core deposits in the community.
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\16\ Commenters offered various suggestions regarding the
seasonal credit program. Some thought that the seasonal credit rate
should be even lower than the existing rate formula provides, and
one asked that the Reserve Banks offer borrowers a choice of fixed
or variable rates. Another commenter opined that the Reserve Banks
should accept a broader range of assets as collateral, consider a
``blanket pledging agreement'' such as that used by the FHLBs, and
stop demanding to take physical possession of the collateral. (The
Board notes that in fact only a small fraction of collateral is held
physically by the Reserve Banks. Most collateral is held by the
pledging institution or pledged electronically.) One commenter
suggested that Reserve Banks should allow depository institutions to
borrow up to the entire amount of the assets they pledge as
collateral (in other words, with no ``haircut''). Some commenters
indicated that the Federal Reserve should not require banks to
demonstrate that their seasonal needs were for four consecutive
weeks and should not vary an institution's seasonal credit line from
month to month. Other commenters suggested that the Federal Reserve
simplify both the eligibility criteria and the information
requirements in connection with seasonal credit and requested that
the Reserve Banks do more to promote awareness of the seasonal
credit program.
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Several commenters indicated that eliminating the seasonal credit
program would be harmful in other ways. Many institutions expressed
concern that, without that program, the FHLBs would become their only
viable alternative liquidity source and that they would be overly
exposed to the FHLBs. Other depository institutions argued that if they
could not obtain funding on terms comparable with those of the seasonal
credit program, they in turn would not be able to compete effectively
with other lenders, including the Farm Credit System, for agricultural
loans.
Section 201.4(c) of the final rule leaves the seasonal credit
unchanged, except for technical revisions contained in the Board's
proposal.
Lowering the Primary Credit Rate in a Financial Emergency
In a financial emergency, lowering the discount rate would help to
prevent an undue tightening of money markets, even if the Federal
Reserve's ability to provide reserves through open market operations
were constrained by the timing or effects of the conditions giving rise
to the financial emergency. Especially in light of the events of
September 11, 2001, when the System needed to make monetary policy and
lending decisions quickly, the Board believes that it is desirable to
ensure that the primary credit rate is lowered expeditiously in
response to a financial emergency.
Section 201.51(d)(2) of the Board's rule defines a financial
emergency as a significant disruption to the U.S. money markets
resulting from an act of war, military or terrorist attack, natural
disaster, or other catastrophic event. Ideally, a quorum of the Board
would be present to review and determine the primary credit rate at the
time a financial emergency occurred. However, to ensure that the
Board's determination to lower the rate in response to a financial
emergency could take effect even in the absence of a quorum, Sec.
201.51(d) of the Board's final rule provides that the primary credit
rate is reduced to the FOMC's target federal funds rate if in a
financial emergency a Reserve Bank has requested that the primary
credit rate be established at the target federal funds rate and the
Chairman of the Board (or, in the absence of the Chairman, his
designee) certifies at the time of the financial emergency that a
quorum of the Board is not available. If the primary credit rate were
lowered as a result of this provision, the primary credit rate then
would float with the target federal funds rate, which the FOMC would
continue to set. This provision of Regulation A implements the Board's
decision that lowering the primary credit rate to the target federal
funds rate in a financial emergency is the appropriate course of
action. The Federal Reserve Banks are establishing analogous internal
procedures to address the possibility that their boards of directors or
other duly authorized officials might be unavailable or otherwise
unable to communicate a rate request to the Board in a timely manner
during a financial emergency.
Reorganization of and Changes to Other Provisions of Regulation A
Section 201.1 Authority, Purpose and Scope
The Board's final rule amends this section to include as sources of
authority sections 11(i)-11(j) and 14(d) of the Federal Reserve Act,
which respectively provide the Board with rulemaking authority and
general supervisory authority over the Reserve Banks and authorize the
Reserve Banks, subject to the review and determination of the Board, to
establish discount rates. This section also gathers all existing
provisions concerning the scope of Regulation A into one section by
incorporating language from existing Sec. 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 remains unchanged except for the deletion of five
definitions. The definition of ``eligible institution'' (existing Sec.
201.2(j)) is unnecessary because it related only to the SLF that was
established for use during the months surrounding the January 1, 2000,
date change. The definition of ``targeted federal funds rate''
(existing Sec. 201.2(k)) also originally was used only in connection
with the SLF. Although the new emergency rate procedure provision also
refers to the target federal funds rate, that provision
[[Page 67784]]
explains precisely what the term means. The Board therefore believes
that there is no need to define the term ``targeted federal funds
rate'' in the definition section.
The Board also is deleting the terms ``liquidation loss,''
``increased loss,'' and ``excess loss,'' (existing Sec. 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
Federal Deposit Insurance Corporation (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. Since the enactment of section
10B(b) in 1991, section 10B(b)'s payment provision has not been used.
The Board continues to believe that the three definitions describe
accurately and in detail the calculations required by section 10B(b)
and, should it become necessary in the future, the Board would
calculate the amount that it owed to the FDIC in accordance with the
methods described in these three definitions. However, because the
definitions only describe what the statute already requires, the Board
believes that the regulation would be less cumbersome but no less
accurate if Sec. 201.5 of the final rule (regarding lending to
undercapitalized and critically undercapitalized institutions) simply
cross-referenced section 10B(b) of the Federal Reserve Act.
One commenter suggested that the Board amend its definition of
``depository institution'' to include bankers'' banks, which
specifically are excluded from the definition under existing Regulation
A. The Board previously has determined that the discount window is an
appropriate source of liquidity for depository institutions that are
subject to reserve requirements, and the definition of the term
``depository institution'' in Regulation A therefore is based on the
provisions in section 19 of the Federal Reserve Act and in the Board's
Regulation D regarding those institutions that must maintain reserves.
Those provisions specifically exempt bankers' banks from maintaining
reserves, and because bankers' banks generally avail themselves of that
exemption the Board continues to believe that bankers' banks also
generally should not have access to the discount window. The Board
therefore is not changing its definition of ``depository institution''
for purposes of Regulation A. However, the Board notes that bankers'
banks are free to choose to be subject to the reserve requirements of
section 19 of the Federal Reserve Act and Regulation D. The Board
previously has allowed Reserve Banks to grant discount window access to
a bankers' bank that voluntarily maintain reserves, and the Board
expects that practice to continue under this final rule.
Section 201.3 General Requirements Governing Extensions of Credit
The Board is adopting Sec. 201.3 as it appeared in the proposed
rule. This section prescribes the Board's general rules governing a
Federal Reserve Bank's extension of credit and combines in one place
all the existing provisions of Regulation A that relate to the Reserve
Bank's authority to extend credit, how credit is extended, and the
requirements that apply to extensions of credit. This 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. Section 201.3 cross-references the Reserve Banks'
authority under section 13A of the Federal Reserve Act to lend to an
institution that is part of the farm credit system, and accordingly the
Board is deleting existing Sec. 201.8 that deals with that topic.
Section 201.3 preserves existing text of Regulation A stating that
a Reserve Bank has no obligation to make, increase, renew, or extend
any advance or discount to a depository institution, and that any
extension of credit the Reserve Bank chooses to make must be secured to
the satisfaction of the Reserve Bank. The collateral policies of the
Reserve Banks, as described in the Reserve Banks' Operating Circular
No. 8, will remain unchanged. Section 201.3 contains existing text from
Sec. 201.4(d) providing that a Reserve Bank should ascertain whether
an institution is undercapitalized or critically undercapitalized
before extending credit to that institution and includes new text
stating that if a Reserve Bank extends credit to such an institution
then the Reserve Bank must follow special lending procedures.
Regarding the rules that apply to a borrower's use of central bank
credit, Sec. 201.3(d) contains new language that explicitly permits 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 is deleting existing Sec. 201.6(a), which provides that a
depository institution may not use Federal Reserve credit as a
substitute for capital, because the Board believes that other
provisions of the statutes and regulations that it administers
adequately address this issue. Section 201.5 Limitations on
Availability and Assessments.
This section is unchanged from the proposed rule and describes 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, Sec. 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. As discussed above,
the proposed rule 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.
Technical Amendment to Regulation D
In connection with its amendments to Regulation A, the Board is
adopting a conforming amendment to Sec. 204.7 of Regulation D. This
section currently provides that the penalty charge for reserve
deficiencies shall be 2 percentage points per year above the lowest
rate (generally the adjustment credit rate) in effect for borrowings
from the Federal Reserve Bank. In the recent past, the adjustment
credit rate has consistently been set 50 basis points below the target
federal funds rate, and the reserve deficiency charge therefore has
been 150 basis points above the target federal funds rate.
The amendment to Sec. 204.7 will base the charges for reserve
deficiencies on the new primary credit rate in Regulation A and will
authorize the Reserve Banks to assess charges for reserve deficiencies
at a rate of 1 percentage point above the average primary credit rate.
Under the revised formula, when the primary credit rate is 100 basis
points above the target federal funds rate the reserve deficiency
charge will be 200 basis points above the target federal funds rate.
The conforming amendment will maintain approximate uniformity between
the current and new levels of the deficiency charge.
[[Page 67785]]
The Board does not believe the slight difference between the
current and new deficiency charge formulas is significant given the
infrequency of reserve deficiency charges, the ability of the Reserve
Banks to waive the charges under certain circumstances, and the future
potential for variations in the spread between the target federal funds
rate and the primary credit rate.
Administrative Procedure Act
The provisions of 5 U.S.C. 553(b), relating to notice and public
participation, were not followed in connection with the adoption of the
technical amendment to Regulation D because this change merely adjusts
the penalty charged for reserve deficiencies to conform with the
amended borrowing rates of Regulation A, while approximating the
current level of the reserve deficiency charge. The Board for good
cause finds that delaying the change in the penalty charge for reserve
deficiencies in order to allow notice and public comment on the change
is unnecessary.
Regulatory Flexibility Act Certification
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 605(b)), the Board certifies that the amendments to Regulation A
will not have a significantly adverse economic impact on a substantial
number of small entities.
Regulation A establishes rules under which Federal Reserve Banks
may extend credit to depository institutions as a backup source of
liquidity. The final rule replaces the existing adjustment and extended
credit programs with primary and secondary credit programs. Like the
existing regulation, the final rule does not require an institution to
use those programs. The vast majority of institutions that choose to
borrow under the new programs will be eligible for primary credit,
which has fewer conditions, requirements, and administrative costs than
the adjustment credit program that it replaces. The final rule does not
materially alter the existing seasonal credit program, which is
available to small depository institutions with pronounced seasonal
funding needs, except to remove a prerequisite to borrowing that the
Reserve Banks in practice have not used for some time.
Based on 2001 call report data, there are approximately 16,250
depository institutions in the United States that have assets of $150
million or less and thus are considered small entities for purposes of
the Regulatory Flexibility Act. In 2001, approximately 161 small
depository institutions received adjustment credit, none received
extended credit, and approximately 156 received seasonal credit.\17\
Although the Board solicited comment on the impact that the proposed
rule would have on small depository institutions, no commenters
specifically addressed that subject. However, the Board anticipates
that the few small depository institutions that make use of the
existing discount window programs will find the new programs to be
comparatively more accessible and less burdensome, which should enable
more efficient use of the discount window.
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\17\ The Board notes that the volume for seasonal credit in 2001
was below average.
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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 final rule
under the authority delegated to the Board by the Office of Management
and Budget. The final 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 Parts 201 and 204
Banks, Banking, Federal Reserve System, Reporting and recordkeeping
requirements.
Authority and Issuance
For the reasons set forth in the preamble, the Board is amending 12
CFR Chapter II as follows:
PART 201--EXTENSIONS OF CREDIT BY FEDERAL RESERVE BANKS (REGULATION
A)
1. The authority citation for part 201 is revised to read as
follows:
Authority: 12 U.S.C. 248(i)-(j), 343 et seq., 347a, 347b, 347c,
348 et seq., 357, 374, 374a, and 461.
2. Sections 201.1 through 201.5 are revised to read as follows:
Sec. 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), 343 et seq., 347a, 347b, 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.
Sec. 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
[[Page 67786]]
that is not required to maintain reserves under Sec. 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.
Sec. 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 Sec. 201.4 of
this part or by discounting certain types of paper. A Federal 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 Sec. 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 Sec. 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.
Sec. 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, as a backup
source of funding to a depository institution that is in generally
sound financial condition in the judgment of the Reserve Bank. Such
primary credit ordinarily is extended with minimal administrative
burden on the borrower. A Federal Reserve Bank also may extend primary
credit with maturities up to a few weeks as a backup source of funding
to a depository institution if, in the judgment of the Reserve Bank,
the depository institution is in generally sound financial condition
and cannot obtain such credit in the market on reasonable terms. Credit
extended under the primary credit program is granted at the primary
credit rate.
(b) Secondary credit. A Federal Reserve Bank may extend secondary
credit on a very short-term basis, usually overnight, as a backup
source of funding to 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 a timely return to a reliance on
market funding sources. A Federal Reserve Bank also may extend longer-
term 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 credit
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
[[Page 67787]]
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.
Sec. 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)(3).
(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)(2).
(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. 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.
Sec. Sec. 201.6-201.9 [Removed]
3. Sections 201.6, 201.7, 201.8, and 201.9 are removed.
4. Section 201.51 is revised to read as follows:
Sec. 201.51 Interest rates applicable to credit extended by a Federal
Reserve Bank.
(a) Primary credit. The rate for primary credit provided to
depository institutions under Sec. 201.4(a) is a rate above the target
federal funds rate of the Federal Open Market Committee.
(b) Secondary credit. The rate for secondary credit extended to
depository institutions under Sec. 201.4(c) is a rate above the
primary credit rate.
(c) Seasonal credit. The rate for seasonal credit extended to
depository institutions under Sec. 201.4(b) is a flexible rate that
takes into account rates on market sources of funds.
(d) Primary credit rate in a financial emergency. (1) The primary
credit rate at a Federal Reserve Bank is the target federal funds rate
of the Federal Open Market Committee if:
(i) In a financial emergency the Reserve Bank has established the
primary credit rate at that rate; and
(ii) The Chairman of the Board of Governors (or, in the Chairman's
absence, his authorized designee) certifies that a quorum of the Board
is not available to act on the Reserve Bank's rate establishment.
(2) For purposes of this paragraph (d), a financial emergency is a
significant disruption to the U.S. money markets resulting from an act
of war, military or terrorist attack, natural disaster, or other
catastrophic event.
Sec. 201.52 [Removed]
5. Section 201.52 is removed.
PART 204--RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS
(REGULATION D)
1. The authority citation for part 204 continues to read as
follows:
Authority: 12 U.S.C. 248(a), 248(c), 371a, 461, 601, 611, and
3105.
2. Amend Sec. 204.7 by revising the second sentence of paragraph
(a)(1) to read as follows:
Sec. 204.7 Penalties.
(a) * * *
(1) * * * Federal Reserve Banks are authorized to assess charges
for deficiencies in required reserves at a rate of 1 percentage point
per year above the primary credit rate, as provided in Sec. 201.51(a)
of this chapter, in effect for borrowings from the Federal Reserve Bank
on the first day of the calendar month in which the deficiencies
occurred. * * *
* * * * *
By order of the Board of Governors of the Federal Reserve
System, October 31, 2002.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 02-28115 Filed 11-6-02; 8:45 am]
BILLING CODE 6210-01-P