[Federal Register Volume 64, Number 102 (Thursday, May 27, 1999)]
[Proposed Rules]
[Pages 28768-28770]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-13551]


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FEDERAL RESERVE SYSTEM

12 CFR Part 201

[Regulation A; Docket R-1038]


Extensions of Credit by Federal Reserve Banks

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule.

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SUMMARY: The Board is proposing to amend its Regulation A to establish 
a special lending program under which Federal Reserve Banks will extend 
credit at a rate above the Federal Open Market Committee's targeted 
federal funds rate to eligible institutions to accommodate liquidity 
needs during the century date change period. Unlike adjustment credit, 
borrowers would not be required to seek credit elsewhere first, uses of 
funds would not be limited, and the loans could be outstanding for a 
considerable period.

DATES: Comments must be submitted on or before July 2, 1999.

ADDRESSES: Comments, which should refer to Docket No. R-1038, may be 
mailed to Ms. Jennifer J. Johnson, Secretary, Board of Governors of the 
Federal Reserve System, 20th and C Streets, NW, Washington, D.C. 20551. 
Comments addressed to Ms. Johnson also may be delivered to the Board's 
mail room between 8:45 a.m. and 5:15 p.m. and to the security control 
room outside of those hours. Both the mail room and the security 
control room are accessible from the courtyard entrance on 20th Street 
between Constitution Avenue and C Street, NW. Comments may be inspected 
in Room MP-500 between 9:00 a.m. and 5:00 p.m.

FOR FURTHER INFORMATION CONTACT: James A. Clouse, Chief, Monetary and 
Financial Market Analysis Section (202/452-3922), or William R. Nelson, 
Economist (202/452-3579), Division of Monetary Affairs; Oliver I. 
Ireland, Associate General Counsel (202/452-3625), or Stephanie Martin, 
Senior Counsel (202/452-3198), Legal Division. For the hearing impaired 
only, contact Diane Jenkins, Telecommunications Device for the Deaf 
(TDD) (202/452-3544), Board of Governors of the Federal Reserve System, 
20th and C Streets, NW, Washington, D.C. 20551.

SUPPLEMENTARY INFORMATION: The Board is requesting comment on proposed 
amendments to its Regulation A (12 CFR part 201), Extensions of Credit 
by Federal Reserve Banks, to provide an additional mechanism under 
which Federal Reserve Banks will make discount window credit available 
to depository institutions in the months surrounding the century date 
change. The Board expects that, with advance planning, depository 
institutions will be able to meet their liquidity needs during the 
century date change period relying on their usual sources of funds, 
including adjustment credit at the discount window. The Board 
recognizes, however, that uncertainty surrounds potential developments 
over the period. The proposed Special Liquidity Facility is intended to 
provide that an assured source of funds is available to relieve unusual 
liquidity pressures that depository institutions may experience.

Background

    Depository institutions and their customers are now making plans to 
meet possible credit needs in the period surrounding the century date 
change. Uncertainty exists, however, as to the extent of demands and 
the cost and availability of credit in the market during the year-end 
period. Furthermore, banks are handicapped in playing their traditional 
role as lenders to non-banks by the possibility that the banks 
themselves will be under some liquidity pressure at that time. 
Liquidity pressure could come from conversion of deposits to currency 
and shifting of credit demands to banks from markets. Moreover, the 
incidence of credit demands is extremely difficult to predict and could 
involve pressures on small or medium-sized depository institutions that 
are customarily suppliers of funds to larger institutions and markets 
and hence would not have well-established borrowing relationships.
    To a considerable extent, Federal Reserve open market operations 
can meet liquidity demands in reserve markets, such as the large 
seasonal increase in demand for currency in November and December of 
each year. During the century date change period, however, demands for 
and supplies of reserves will be very difficult to predict. The unusual 
funding situations of institutions and uncertainty about the status of 
potential borrowers may disrupt the normal distribution of reserves and 
liquidity through markets. Volatility in the demand for reserves could 
be compounded by a drop in required reserve balances at the Reserve 
Banks as depository institutions increase vault cash holdings to meet 
potential customer demands.
    Banking supervisors have urged depository institutions to make firm 
contingency plans for meeting unexpected liquidity demands during the 
century date change period. Supervisors have encouraged depository 
institutions to make the Federal Reserve's discount window part of 
those plans. Although borrowing through the usual adjustment credit 
facility of the discount window should be adequate to meet most unusual 
needs and alleviate possible pressures on money markets, in practice 
depository institutions have been reluctant in the past to take 
advantage of such credit. Moreover, adjustment credit requires 
borrowers to seek funds elsewhere first, limits uses of such credit, 
and is usually limited in duration.

Special Liquidity Facility

    The proposed Special Liquidity Facility would make collateralized 
Federal Reserve Bank credit more freely available, albeit at an 
interest rate somewhat above depository institutions' normal cost of 
funds. By assuring the availability of Reserve Bank credit, the 
Facility should enable depository institutions and their customers to 
commit to meeting possible credit needs with greater confidence. The 
Facility

[[Page 28769]]

should also help to damp any tendency for money markets to tighten 
owing to transitory imbalances in the supply and demand of reserves.

Rate and Duration

    Credit under the Special Liquidity Facility would be available from 
November 1, 1999, to April 7, 2000, at a spread over the Federal Open 
Market Committee's targeted federal funds rate. The Board tentatively 
proposes that the spread be set at 1.5 percentage points, but the Board 
specifically requests comment on whether the size of the proposed 
spread is appropriate. The Board would like the spread to be high 
enough to encourage institutions to continue to make private-sector 
arrangements to meet potential funding needs, but low enough to provide 
a reasonable backstop should, contrary to the Board's expectations, 
concerns about the century date change or the change itself begin to 
put strains on funding and credit markets. The Board also requests 
comment on how long the facility should be open, in particular whether 
it should begin earlier so that loans under the facility would be 
available as one means to fund the build-up in the vault cash 
inventories expected to occur in the early fall.
    Depository institutions will not be expected to make portfolio 
adjustments to repay loans promptly. Special Liquidity Facility loans 
may be outstanding for a considerable period--until the program 
expires. This is in contrast to adjustment credit, which is generally 
expected to be repaid expeditiously. Institutions that anticipate a 
very short-term need for Federal Reserve credit (such as meeting 
reserve requirements on the last day of a maintenance period), 
including institutions that have loans outstanding under the Special 
Liquidity Facility, could continue to obtain regular adjustment credit 
at the basic discount rate.

Collateral

    The collateral requirements for Special Liquidity Facility credit 
would be identical to those for other discount window loans, all of 
which must be fully collateralized to the satisfaction of the Reserve 
Bank. Borrowing institutions must have pre-positioned collateral (as 
well as have the necessary authorizations signed) to have access to 
credit the day it is requested. Reserve Banks accept a wide range of 
loans and securities as collateral, but unless the collateral is traded 
in active markets, such as a Treasury or Agency security, Reserve Banks 
must have time to determine the lendable value.

Eligible Borrowers

    Although many normal discount window conditions would not apply, 
credit under the Special Liquidity Facility would remain discretionary. 
The Special Liquidity Facility would be available only to depository 
institutions in sound financial condition. For example, it would not be 
available to depository institutions that are undercapitalized or 
critically undercapitalized. Reserve Bank discounts for and advances to 
such institutions are limited by Sec. 201.4 of Regulation A. That 
section implements amendments to section 10B of the Federal Reserve 
Act,1 which discourages the Reserve Banks from making 
relatively long-term loans to inadequately capitalized institutions. 
Similarly, in the case of credit unions, credit under the Special 
Liquidity Facility would be available only to institutions with a net 
worth ratio (as defined in section 216 of the Federal Credit Union Act) 
2 of at least six percent, which qualifies a credit union as 
adequately capitalized under that Act.3 With respect to 
branches and agencies of foreign banks, credit under the Special 
Liquidity Facility would be available only to a branch or agency that 
is subject to reserve requirements under Regulation D and where the 
borrowing bank meets the equivalent of the Basle Capital Accord's 
minimum standards for capital and is otherwise considered to be in 
sound financial condition.
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    \1\ 12 U.S.C. 347b(b).
    \2\ 12 U.S.C. 1790d(o)(3).
    \3\ Section 216 of the Federal Credit Union Act will take effect 
on August 7, 2000, except for special provisions regarding risk-
based net worth requirements, which take effect on January 1, 2001. 
The National Credit Union Administration has initiated rule-making 
procedures to adopt rules to implement the Act, but no final rules 
are yet in place. See 64 FR 27090, May 18, 1999.
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    Even where an institution meets these minimum requirements, a 
Reserve Bank may determine that the institution is not in sound 
financial condition and therefore is ineligible to borrow under the 
Special Liquidity Facility. As a part of making such determinations, 
the Board or Reserve Bank may discuss an institution's financial 
condition or other matters related to the loan with its U.S. supervisor 
or, in the case of a foreign bank, its home country supervisor or 
central bank.

Exhaustion of Alternative Liquidity Sources

    Although lending under the Special Liquidity Facility would 
continue to be discretionary, credit under the Facility would not be 
subject to the Regulation A requirement, applicable to adjustment 
credit, that the borrower exhaust alternative liquidity sources before 
coming to the discount window. This requirement is intended to assure 
that Reserve Banks are the lenders of last resort and that discount 
window adjustment credit, available at a subsidy to the market, does 
not substitute for or interfere with market mechanisms for distributing 
liquidity. In the case of Special Liquidity Facility credit, the 
elevated rate is expected to be sufficient to discourage most use 
except when market mechanisms are under stress.

Permissible Uses of Funds

    Similarly, credit under the Special Liquidity Facility is not 
subject to restrictions on use as is adjustment credit, which is 
intended to be used for temporary shortfalls of funds. Depository 
institutions could use Special Liquidity Facility credit to meet 
funding shortfalls caused, for example, by customers drawing down 
deposits to obtain currency, but they could also use such credit to 
make loans or investments.

Monitoring

    To assure compliance with the conditions for adjustment credit, 
Reserve Banks monitor the activities of borrowing institutions, 
especially when adjustment credit is outstanding longer than overnight 
or when the institution has become a relatively frequent borrower. 
Depository institutions supply balance sheet data to discount window 
officers to facilitate this process. Such monitoring and reporting 
usually would not occur under the Special Liquidity Facility. 
Supervisory authorities may need to assess the condition of the 
borrowing institution if the reliance on Reserve Bank credit is 
accompanied by signs of financial trouble. Borrowing by itself, 
however, will not be taken as an indication of underlying problems and 
will not trigger intensified oversight.

Regulatory Flexibility Act Certification

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 605(b)), the Board certifies that proposed amendments to 
Regulation A will not have a significant adverse economic impact on a 
substantial number of small entities. The rule would not impose any 
additional requirements on entities affected by the regulation but 
rather would make an additional lending facility available to meet 
depository institutions' liquidity needs related to the century date 
change.

[[Page 28770]]

List of Subjects in 12 CFR Part 201

    Banks, banking, Credit, Federal Reserve System.

    For the reasons set out in the preamble, 12 CFR part 201 is 
proposed to be amended as set forth below:

PART 201--EXTENSIONS OF CREDIT BY FEDERAL RESERVE BANKS (REGULATION 
A)

    1. The authority citation for 12 CFR part 201 continues to read as 
follows:

    Authority: 12 U.S.C. 343 et seq., 347a, 347b, 347c, 347d, 348 et 
seq., 357, 374, 374a and 461.

    2. In Sec. 201.2, new paragraphs (j) and (k) are added to read as 
follows:


Sec. 201.2  Definitions.

* * * * *
    (j) Eligible institution means--
    (1) A depository institution as defined in paragraphs (c)(1) (i) 
through (iii), (v), or (vi) of this section that is in sound financial 
condition and is not subject to the borrowing limitations in 
Sec. 201.4(a) and (b); or
    (2) A depository institution that is a credit union defined in 
paragraph (c)(1)(iv) of this section that is in sound financial 
condition and has a net worth ratio as defined in section 216 of the 
Federal Credit Union Act (12 U.S.C. 1790d(o)(3)) of not less than 6 
percent.
    (k) Targeted federal funds rate means the federal funds rate 
targeted by the Federal Open Market Committee.
    3. In Sec. 201.3, new paragraph (e) is added to read as follows:


Sec. 201.3  Availability and terms.

* * * * *
    (e) Special liquidity facility for century date change. Federal 
Reserve Banks may extend credit between and including November 1, 1999, 
and April 7, 2000, under a special liquidity facility to ease liquidity 
pressures during the century date change period. This type of credit is 
available only to eligible institutions. This type of credit is granted 
at a special rate above the basic discount rate and other market rates 
for funds, is available for the entire length of the period, and is not 
subject to the conditions regarding specific use or exhaustion of other 
liquidity sources as is adjustment credit under paragraph (a) of this 
section.
    4. In Sec. 201.7, the introductory text is designated as paragraph 
(a), and a new paragraph (b) is added to read as follows:


Sec. 201.7  Branches and agencies.

* * * * *
    (b) This part applies to a United States branch or agency of a 
foreign bank in the same manner and to the same extent as an eligible 
institution if the foreign bank is in sound financial condition and 
holds capital equivalent to the minimum levels that would be required 
under the Capital Accord of the Basle Committee on Banking Supervision.
    5. In Sec. 201.52, a new paragraph (c) is added to read as follows:


Sec. 201.52  Extended credit for depository institutions.

* * * * *
    (c) Special liquidity facility. The rate for credit extended to 
eligible institutions under the special liquidity facility provisions 
in Sec. 201.3(e) is equal to the targeted federal funds rate plus 1.5 
percentage points on each day the credit is outstanding.

    By order of the Board of Governors of the Federal Reserve 
System, May 21, 1999.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 99-13551 Filed 5-26-99; 8:45 am]
BILLING CODE 6210-01-P