1. The Role of the Discount Window in Contingency Funding Planning Toby Trocchio - Manager, CRM 1

2. Disclaimer The views expressed herein are those of the author and not necessarily those of the Federal Reserve Bank of Cleveland or the Federal Reserve System. This presentation is intended to provide those attending the seminar with information about matters of current interest. It is accompanied by important supplemental remarks. It should not be construed as advice concerning any specific supervisory, legal, accounting or other matter, and regulated institutions should not act upon it without contacting the appropriate regulators or professionals. 2

3. Today’s Agenda The Discount Window – an overview The role of the discount window in contingency funding planning Regulator perspectives on the discount window The role of the Discount Window and your correspondent in account management Getting started – documents, collateral options, etc Maintaining, updating and testing your access Common questions about the Discount Window 3

4. The Discount Window – An Overview 4

5. 5 Discount Window Functions Source of liquidity for individual institutions -Reliable back-up funding source to meet unexpected funding demands and needs -Relieve liquidity strains in the banking system Act as a safety valve in relieving pressures in reserve markets Assure the basic stability of money markets

6. 6 Discount Window Credit Programs Primary Credit Secondary Credit Seasonal Credit

7. Primary Credit Program Available to DIs in generally sound financial condition -At least a “3” supervisory composite rating -At least adequately capitalized Prior to August 2007,and subsequent to the spring of 2010 almost entirely overnight loans (can be up to a couple of weeks) Rate is set as a spread over fed funds target rate (Discount) Rate “No questions asked” 7

8. Prudent Use of Primary Credit Program Short term back-up source of liquidity -Unexpected operational issue: E.S FHLB borrowing had closed -In danger of occurring a daylight overdraft -Regional or institution contingency event (natural event, power outage etc…) -Arbitrage 8

9. Non-prudent use of the Discount Window Using the Discount Window as a primary source of funding Long term funding solution Continued use of the window could be indicator of deteriorating financial condition Inconsistent/ Unusual use of the window compared to past behavior 9

10. Secondary Credit Program Available to DIs whose condition makes them ineligible for Primary Credit DIs generally composite 4 rated or worse and/or less than adequately capitalized -As the condition deteriorates so does the DW flexibility in lending Rate is set as a spread over Primary Credit rate Questions will be asked 10

11. Secondary Program…… nuances Physical delivery of loan collateral may be required at some level of deterioration -When in delivery documentation required may include: Original notes and associated mortgages Any amendments and modifications Guarantees and security agreements UCCs Other documents as requested by the district 11

12. Seasonal Credit Program Lends funds to institutions that can demonstrate seasonality in lending and deposit activities Maturity up to one month, can lend up to 9 out of 12 calendar months Limited to institutions less than $500MM in total deposits that meet seasonality test Example: DI’s specializing in agricultural and resort business DIs must apply for the program 12

13. Condition Monitoring CRM monitors the condition of all depository institutions in the 4 th District When an institution’s condition deteriorates to an unhealthy level (generally, CAMELS 4 or 5), we normally take away daylight credit privileges and institute other risk control measures. We will work with the primary regulator to understand the liquidity position of the institution and its future prospects. 13

14. Regulator Perspectives on the Discount Window 14

15. Regulator Perspectives on the Discount Window Occasional and prudent use of the Window for its intended purposes should be considered unexceptional and acceptable Discount Window credit can be a suitable and reliable back-up funding vehicle Discount Window is a desirable element of liquidity and contingency funding plans 15

16. The Role of the Discount Window in Contingency Funding Planning 16

17. The Role of the Discount Window in Contingency Funding Planning Contingency Situations Institution-specific Local / Regional or Systemic Response expectations during contingency events FRB Staff will strive to provide the highest level of assistance and information possible Institutions are expected to manage their account through the contingency situation Business continuity plans are in place to direct an operational response for the event at hand 17

18. The Role of the Discount Window in Contingency Funding Planning CFP should incorporate the Discount Window, but in an appropriate manner Scenario analyses should reflect the window terms as they would be available Discount Window access should be complete and up to date if included in CFP 18

19. The Role of the Discount Window and your Correspondent in Account Management 19

20. The Role of the Discount Window and your Correspondent in Account Management Federal Reserve membership is not necessary to access the Discount Window A Federal Reserve Master Account is not necessary to access the Discount Window Correspondent agreements are common among participating institutions Federal Reserve accounts are expected to be managed appropriately even if only used for purposes of Discount Window loans 20

21. Getting Started – Documents, Collateral Options, etc. 21

22. Getting Started – Documents, Collateral Options, etc. Loan agreements from Operating Circular 10 -Legal Documents Letter of Agreement Authorizing Resolutions for Borrowers Certificate Official Authorization List Correspondent Agreement (potentially) Collateral -Securities -Loans Program-specific requirements -Seasonal, TAF, other 22

23. Getting Started – Documents, Collateral Options, etc. Securities -Treasuries -Agencies -Municipals -Mortgage-backed and asset-backed -Many others Loans -Borrower in Custody program allows DIs in sound condition to retain physical custody of loan files -FRB takes custody of loan files pledged by DIs in weak condition – varies by district 23

24. Getting Started – Documents, Collateral Options, etc. The DW provides valuation margins for the most commonly pledged asset types. Assets accepted as collateral are assigned a lendable value (market or face value multiplied by the margin) deemed appropriate by the Federal Reserve Bank. The financial condition of an institution may be considered when assigning values. -Additional haircut for troubled DIs 24

25. Maintaining, Updating and Testing your Access 25

26. Maintaining, Updating and Testing your Access Must do’s -Establish -Maintain -Test -Manage Incorporate Discount Window readiness management into your institution’s annual planning. Involve your internal/external auditors to test plan management. 26

27. Common Questions About the Discount Window 27

28. -Why would a sound bank turn to the higher cost DW if other funding sources are available? -Can a Primary Credit-eligible depository institution use the Federal Reserve as a regular source of funds? -How do bank supervisors/examiners view an institution's borrowing from the primary credit program? Common Questions About the Discount Window 28

29. What costs are involved with establishing a DW arrangement? -Direct -Indirect Timeline for setting up Discount Window capacity -Depends on: Starting point Account status Collateral type Perfection issues Common Questions About the Discount Window 29

30. 4 th District Contact Information Discount Window Information -www.frbdiscountwindow.orgwww.frbdiscountwindow.org -www.clevelandfed.org/bankingwww.clevelandfed.org/banking Credit Risk Management Contacts -Toby Trocchio – Manager ttrocchio@clev.frb.org 216-579-2955ttrocchio@clev.frb.org -Todd Berardinelli – Banking Supervisor tberardinelli@clev.frb.org 216-579-2922tberardinelli@clev.frb.org -Eric Polansky – Senior Credit Analyst epolansky@clev.frb.org216-579-3036epolansky@clev.frb.org -Garry Madis – Credit Analyst gmadis@clev.frb.org216-774-2686gmadis@clev.frb.org 30

31. Other questions………… 31 Contact Toby Trocchio -ttrocchio@clev.frb.orgttrocchio@clev.frb.org -216-579-2955

32. The Role of the Discount Window in Contingency Funding Planning Toby Trocchio - Manager, CRM 32