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

2 Presentation Outline Background information Overview of Discount Window lending programs Questions

3 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

4 System Structure - Districts

5 Background Information Statutory and Regulatory Considerations -Federal Reserve Act -Monetary Control Act of Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) -Regulations A and D

6 Discount Window Functions Act as a safety valve in relieving pressures in reserve markets Backup source of liquidity for individual institutions Relieve liquidity strains in the banking system Assure the basic stability of money markets

7 Discount Window Credit Programs Primary Credit generally available for short periods of time, usually overnight; flexible with smaller institutions Secondary Credit may be available to institutions not in satisfactory financial condition Seasonal Credit available to small institutions with a pronounced seasonal funding need.

8 Enhance monetary policy implementation Reduce stigma in coming to Window Simplify administration Improve consistency across Federal Reserve System Specifically supported by inter-agency statement dated July 23, 2003 Objectives of Primary & Secondary Credit Programs

9 Eligibility Primary Credit CAMELS 1, 2, or 3 At least adequately capitalized Supplementary information supports sound condition Secondary Credit Not eligible for Primary Credit Discretion of the Reserve Bank

10 Primary vs. Secondary Credit

11 Primary vs. Secondary Credit

12 Seasonal Borrowing Program Established in early 1970s to assist smaller institutions Must demonstrate seasonal pattern Qualifying institutions are typically in agricultural or tourist areas. Institutions with deposits over $500 million will not qualify

13 Seasonal Borrowing Program Any single loan under the program may be for up to 30 days May access the program for 9 months out of a 12 month period Market rate adjusted every two weeks based on average Fed funds rate and 90 day CD rate

14 Recent Changes to Federal Reserve Liquidity Provisions Adjustments to Primary Credit Facility Term Auction Facility Primary Dealer Credit Facility Term Secured Lending Facility

15 Primary Credit Program Adjustments to Primary Credit Facility -Spread of lending rate to Fed Funds Rate cut to 50 basis points in August 2007 and to 25 basis points in March Loan terms extended to 30 days in August 2007 and to 90 days in March 2008 and renewable -From August 2007 to May 2008 Fed Funds Rate and Discount Rate lowered 8 times

16 Term Auction Facility Established December 12, 2007 Bi-weekly auctions of 28-day Discount Window credit Same collateral as for primary credit Competitive bid process with highest bid rates being awarded $150 billion auctioned currently In place at least until market conditions improve

17 Primary Dealer Credit Facility Established March 16, 2008 A “standing facility” available to primary dealers Overnight lending Rate is same as primary credit rate Eligible collateral includes a broad range of investment-grade debt securities

18 Term Securities Lending Facility (TSLF) Established March 11, 2008 Available to primary dealers Like TAF, TSLF is an auction facility Auctions relatively illiquid securities in exchange for Treasury securities Weekly auctions of security lending operations for 28-day terms Reserves neutral

19 Actions Taken by Board of Governors Extended the Primary Dealer Credit Facility and the Term Securities Lending Facility through January 30, 2009 Introduced auctions of options on $50 billion of draws on the Term Securities Lending Facility Introduced an 84-day Term Auction Facility (TAF) loan as a complement to the 28-day loan Increased the Fed’s swap line with the European Central Bank (ECB) to $55 billion from $50 billion Announced a new collateral requirement for advances of more than 28-days in maturity (both term-auction credit and term primary credit but not seasonal credit)

20 Access to the Window Documentation To borrow from the Discount Window : Authorizing Resolutions for Borrowers Letter of Agreement Official OC-10 Authorization List Certificate Collateral All advances must be secured by acceptable collateral.

21 Wide Range of Collateral Securities -Treasury -Agency -Municipal -ABS -Corporate Bonds Loans -Consumer -Commercial & Industrial -Commercial Real Estate -Construction -Raw Land

22 Borrower-In-Custody Program Pledged loan collateral held on premises In acceptable financial condition Identify pledged assets Provide monthly list of pledged loans Expect periodic collateral inspections

23 Contingency Planning Essential For All Banking Organizations Understand funding sources and availability Have written formal contingency funding arrangements in place Test periodically

24 The Federal Reserve System Ultimate liquidity provider to the market and individual banking organizations

25 Discount Window Website 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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27 Federal Reserve Bank of San Francisco Contacts Rick Miller, Director, Javier Jerez, Senior Manager, David Xu, Manager