Federal Reserve Bank of San Francisco

The Federal Reserve System Discount WindowCredit Facilities

Western Independent Bankers February 11, 2009

Rick Miller

Credit Risk Management

Director

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Presentation Outline

Background information

Overview of Discount Window lending programs

Questions

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The Federal Reserve is theU.S. Central Bank

Serves as the “bank” for all segments of the banking system: commercial banks, thrifts, and credit unions

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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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Enhance monetary policy implementation

Reduce stigma in coming to Window

Simplify administration

Improve consistency across Federal Reserve System

Specifically supported by inter-agency statement dated July 23, 2003

Objectives of Primary &Secondary Credit Programs

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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

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.

Ol

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Primary vs. Secondary Credit

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.

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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

Loans- Consumer- Commercial & Industrial- Commercial Real Estate- Construction- Raw Land

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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 Websitewww.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 FranciscoContacts

Rick Miller, Director, 415 974 2974

Javier Jerez, Senior Manager, 415 974 2500

David Xu, Manager 415 974 2218