Transcript COSO - Western Independent Bankers

Federal Reserve Bank of San Francisco
The Federal Reserve System
Discount Window
Credit Facilities
Western Independent Bankers
February 11, 2009
Rick Miller
Credit Risk Management
Director
Presentation Outline
 Background information
 Overview of Discount Window lending programs
 Questions
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The Federal Reserve is the
U.S. Central Bank
 Serves as the “bank” for
all segments of the
banking system:
commercial banks,
thrifts, and credit
unions
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System Structure - Districts
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Background Information
 Statutory and Regulatory Considerations
-Federal Reserve Act
-Monetary Control Act of 1980
-Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA)
-Regulations A and D
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Discount Window
Functions
 Act as a safety valve in relieving pressures in
reserve markets
 Backup source of liquidity for individual
institutions
 Relieve liquidity strains in the banking system
 Assure the basic stability of money markets
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Discount Window Credit
Programs
 Primary Credit generally available for short
periods of time, usually overnight; flexible with
smaller institutions
 Secondary Credit may be available to institutions
not in satisfactory financial condition
 Seasonal Credit available to small institutions
with a pronounced seasonal funding need.
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Objectives of Primary &
Secondary Credit Programs
 Enhance monetary policy implementation
 Reduce stigma in coming to Window
 Simplify administration
 Improve consistency across Federal Reserve
System
 Specifically supported by inter-agency statement
dated July 23, 2003
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Eligibility
Primary Credit
 CAMELS 1, 2, or 3
 At least adequately capitalized
 Supplementary information supports sound
condition
Secondary Credit
 Not eligible for Primary Credit
 Discretion of the Reserve Bank
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Primary vs. Secondary
Credit
Ol
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Feature
Primary
Rate
Above the FOMC's target for the federal funds rate.
Term
Short-term, usually overnight, but can also be
extended - ordinarily to very small institutions - for up to
a few weeks if such credit cannot be otherwise
obtained in the market on reasonable terms.
Eligibility
Depository institutions in generally sound financial
condition; same as eligibility for daylight credit.
Use
Generally no restrictions. May be used to fund sales of
federal funds.
Administration
Ordinarily no questions asked. Borrowers need not
exhaust other funding sources.
Primary vs. Secondary
Credit
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Feature
Secondary
Rate
Primary credit rate plus 50 basis points
Term
Short-term, usually overnight. Can be extended for a
longer term if such credit would facilitate a timely return
to reliance on market funding or an orderly resolution of
a failing institution, subject to statutory requirements
(FDICIA restrictions).
Eligibility
Depository institutions that do not qualify for primary
credit.
Use
As a backup source of funding on a very short-term
basis, or to facilitate an orderly resolution of serious
financial difficulties.
Administration
Reserve Banks will collect information necessary to
confirm that borrowing is consistent with regulatory
requirements.
Seasonal Borrowing
Program
 Established in early 1970s to assist smaller
institutions
 Must demonstrate seasonal pattern
 Qualifying institutions are typically in agricultural
or tourist areas.
 Institutions with deposits over $500 million will not
qualify
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Seasonal Borrowing
Program
 Any single loan under the program may be for up
to 30 days
 May access the program for 9 months out of a 12
month period
 Market rate adjusted every two weeks based on
average Fed funds rate and 90 day CD rate
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Recent Changes to Federal Reserve Liquidity
Provisions
 Adjustments to Primary Credit Facility
 Term Auction Facility
 Primary Dealer Credit Facility
 Term Secured Lending Facility
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Primary Credit Program
 Adjustments to Primary Credit Facility
- Spread of lending rate to Fed Funds Rate cut to 50
basis points in August 2007 and to 25 basis points in
March 2008
- Loan terms extended to 30 days in August 2007 and
to 90 days in March 2008 and renewable
- From August 2007 to May 2008 Fed Funds Rate and
Discount Rate lowered 8 times
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Term Auction Facility
 Established December 12, 2007
 Bi-weekly auctions of 28-day Discount Window
credit
 Same collateral as for primary credit
 Competitive bid process with highest bid rates
being awarded
 $150 billion auctioned currently
 In place at least until market conditions improve
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Primary Dealer Credit Facility
 Established March 16, 2008
 A “standing facility” available to primary dealers
 Overnight lending
 Rate is same as primary credit rate
 Eligible collateral includes a broad range of
investment-grade debt securities
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Term Securities Lending Facility
(TSLF)
 Established March 11, 2008
 Available to primary dealers
 Like TAF, TSLF is an auction facility
 Auctions relatively illiquid securities in exchange
for Treasury securities
 Weekly auctions of security lending operations for
28-day terms
 Reserves neutral
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Actions Taken by Board of
Governors
 Extended the Primary Dealer Credit Facility and the Term
Securities Lending Facility through January 30, 2009
 Introduced auctions of options on $50 billion of draws on the
Term Securities Lending Facility
 Introduced an 84-day Term Auction Facility (TAF) loan as a
complement to the 28-day loan
 Increased the Fed’s swap line with the European Central Bank
(ECB) to $55 billion from $50 billion
 Announced a new collateral requirement for advances of more
than 28-days in maturity (both term-auction credit and term
primary credit but not seasonal credit)
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Access to the Window
 Documentation
To borrow from the Discount Window:
 Authorizing Resolutions for Borrowers
 Letter of Agreement
 Official OC-10 Authorization List
 Certificate
 Collateral
All advances must be secured by acceptable collateral.
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Wide Range of Collateral
 Securities
- Treasury
- Agency
- Municipal
- ABS
- Corporate Bonds
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 Loans
- Consumer
- Commercial & Industrial
- Commercial Real Estate
- Construction
- Raw Land
Borrower-In-Custody
Program
 Pledged loan collateral held on premises
 In acceptable financial condition
 Identify pledged assets
 Provide monthly list of pledged loans
 Expect periodic collateral inspections
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Contingency Planning Essential
For All Banking Organizations
 Understand funding sources and availability
 Have written formal contingency funding
arrangements in place
 Test periodically
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The Federal Reserve
System
 Ultimate liquidity provider to the market and
individual banking organizations
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Discount Window Website
www.frbdiscountwindow.org
 Summary of Credit programs & Detailed Collateral
Information
 Federal Reserve Board Press Releases
 Frequently Asked Questions (FAQs)
 Operating Circular 10
 Acceptable Collateral and Margin Table
 Links to each Reserve Bank
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Federal Reserve Bank of San Francisco
Contacts
Rick Miller, Director, 415 974 2974
Javier Jerez, Senior Manager, 415 974 2500
David Xu, Manager 415 974 2218
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