[Federal Register Volume 64, Number 147 (Monday, August 2, 1999)]
[Rules and Regulations]
[Pages 41765-41770]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-19632]
========================================================================
Rules and Regulations
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by the Superintendent of Documents.
Prices of new books are listed in the first FEDERAL REGISTER issue of each
week.
========================================================================
Federal Register / Vol. 64, No. 147 / Monday, August 2, 1999 / Rules
and Regulations
[[Page 41765]]
-----------------------------------------------------------------------
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: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Board is amending its Regulation A to establish a special
lending program under which Federal Reserve Banks will extend credit at
a rate 150 basis points 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 will not be required to seek credit
elsewhere first, uses of funds will not be limited, and the loans may
be outstanding for any period while the facility is open.
EFFECTIVE DATE: October 1, 1999.
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,
Managing Senior Counsel (202) 452-3198, Legal Division. For users of
the Telecommunications Device for the Deaf (TDD), contact Diane Jenkins
(202) 452-3544, Board of Governors of the Federal Reserve System, 20th
and C Streets, N.W., Washington, D.C. 20551.
SUPPLEMENTARY INFORMATION: The Board is amending 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 Special Liquidity
Facility is intended to ensure that a 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 around the century date
change. Their planning is complicated by uncertainty about the cost and
availability of funds to individual depository institutions in the
period surrounding the rollover. Unusual liquidity strains might arise
from the conversion of deposits to currency, heightened credit demands,
greater lender and depositor caution, and potential market disruptions.
While some banks may experience a surge in deposits as investors pull
back from institutions and markets perceived as more vulnerable, the
degree and incidence of shifts in liquidity demands and supplies are
extremely difficult to predict. They could well involve pressures on
small and medium-sized depository institutions that customarily are
suppliers of funds to larger institutions and markets. These smaller
institutions might have difficulty obtaining relatively large volumes
of funds because they typically do not have access to national funding
markets and have limited borrowing relationships with other banks.
To a considerable extent, greater aggregate liquidity needs in
reserve markets can be met using open market operations, as they are,
for example, in November and December of each year when there is a
large seasonal increase in demand for currency. Forecasts of reserve
market pressures, however, will be subject to considerable uncertainty,
and the normal distribution of reserves and liquidity through markets
may be disrupted by the unusual funding situations of institutions and
uncertainty about the status of potential borrowers. Volatility in the
demand for reserves is likely to be compounded by a decline in required
reserves as customers replace transaction accounts with currency and by
a drop in required reserve balances at the Federal Reserve as banks
augment their holdings of vault cash to meet potential customer
demands. Consequently, undesirable tightness and distortions in short-
term funding markets would be a possibility if reliance were to be
placed almost entirely on open market operations to meet liquidity
needs.
Supervisors have urged depository institutions to make firm
contingency plans for meeting unexpected liquidity demands and have
encouraged them to make the Federal Reserve's discount window part of
those plans. Although borrowing by depository institutions through the
usual adjustment credit facility of the discount window should be
adequate to meet most unusual needs and relieve possible pressures on
credit markets, in practice depository institutions have been somewhat
reluctant in the past to use such credit. Moreover, the adjustment
credit program requires borrowers to seek funds elsewhere first,
constrains the uses of the funds, and is normally very limited in
duration.
Special Liquidity Facility
In May 1999, the Board requested comment on amendments to its
Regulation A (12 CFR part 201) to implement a Special Liquidity
Facility that would make collateralized Federal Reserve Bank credit
more freely available, albeit at an interest rate somewhat above
depository institutions' normal cost of funds (64 FR 28768, May 27,
1999). 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 should also help to damp any tendency for money markets to
tighten owing to transitory imbalances in the supply and demand of
reserves.
The Board received 93 comments on its proposal, distributed as
follows:
------------------------------------------------------------------------
Type of institution Number
------------------------------------------------------------------------
Commercial Bank................................................ 63
Trade Association.............................................. 9
Savings Bank................................................... 7
Credit Union................................................... 5
[[Page 41766]]
Federal Reserve Bank........................................... 2
Investment Bank................................................ 2
Government Agency.............................................. 2
Government Sponsored Agency.................................... 1
Clearing House................................................. 1
Consultant..................................................... 1
--------
Total...................................................... 93
------------------------------------------------------------------------
Virtually all of the commenters supported the creation of the Special
Liquidity Facility. The commenters frequently noted that even though
the financial services industry was well prepared for Year 2000, the
facility would provide a desirable degree of certainty that funds would
be available to meet liquidity demands around year-end. Only three
commenters opposed the facility, all of them stating that existing
discount lending programs would be sufficient to meet year-end funding
contingencies.
After considering the comments, which are discussed in detail
below, the Board has adopted the proposed amendments to Regulation A
implementing the Special Liquidity Facility with revisions. The Board
has adopted the proposed rate for the facility of 150 basis points over
the Federal Open Market Committee's targeted federal funds rate. The
Board also moved up the opening date for the facility to October 1,
1999, from the proposed opening date of November 1, 1999. The closing
date will be April 7, 2000, or such later date as determined by the
Board. Finally, the Board has revised the definition of ``eligible
institution'' to mean an institution that is in sound financial
condition in the judgment of the lending Reserve Bank. Such a judgment
may be based on more than simply whether a borrower meets certain
capital standards on a particular date.
Rate
The Board proposed that credit under the Special Liquidity Facility
be available at a spread over the Federal Open Market Committee's
target federal funds rate. The Board tentatively proposed that the
spread be set at 150 basis points, but specifically requested comment
on whether the size of the proposed spread was appropriate.
Nearly 20 percent of the commenters endorsed the facility without
commenting on the proposed lending rate, and another 10 percent
specifically stated that a 150 basis point spread was appropriate.
About 70 percent, however, suggested that the lending rate be set at a
lower spread. Of these, nearly 20 percent stated they preferred a
spread of 50 basis points, while the remainder were divided about
evenly between those requesting less than 50 basis points, 75 basis
points, 100 basis points, or simply stating the spread should be below
150 basis points. The commenters offered a variety of reasons why a
lower spread would be desirable. Several stated that a rate of 150
basis points over the target federal funds rate is so far above their
typical cost of funds that use of the facility would seriously reduce
their profits, placing an undue burden on their institutions. Others
stated that the proposed spread would discourage use of the facility
until liquidity problems had become acute, noting that a lower spread
would be sufficient to promote private-sector arrangements. Many
institutions expressed concern that the proposed spread would become
the standard for the pricing of year-end lines of credit. A few banks
observed that institutions would not borrow at the proposed spread for
fear that it would be taken as a sign of distress.
The lending rate should 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.
It is difficult to determine precisely what spread fits these criteria
in part because loans under the facility could be used for a variety of
purposes and may be extended to a disparate set of depository
institutions. A relatively narrow spread still may be high enough to
offer incentives to large financial institutions of unquestioned credit
quality with access to money and capital markets to seek private-sector
alternatives to the facility, but a wider spread may be required for
other institutions that are smaller or for whom markets perceive a
significant credit risk.
A related difficulty in selecting a spread is that there are no
close analogues to the facility against which to compare the pricing.
Unlike most private or government agency alternatives, the Special
Liquidity Facility requires no fee to establish and may be drawn on and
repaid at any time over the life of the facility without penalty. The
Federal Home Loan Banks (FHLBs) have been offering their members Year-
2000 funding alternatives, but these typically involve restrictions,
fees, or other costs not present in the Special Liquidity Facility. The
implicit prices of FHLB alternatives range from above that proposed for
the facility to somewhat below, depending on the length of time over
which the fees are prorated. Informal discussions with commercial banks
suggest secured lines of credit to high-quality, large banks would be
priced at only a few basis points over LIBOR,1 but the
spread on a similar line to small banks would be over 100 basis points
(LIBOR is now about 25 basis points above the federal funds rate).
Other central banks have arrangements through which they lend reserves
overnight at a penalty rate. The spreads on these facilities range from
25 basis points in Canada to 200 basis points in Switzerland; several
central banks, including the European Central Bank, charge 100 basis
points.
---------------------------------------------------------------------------
\1\ The London Interbank Offered Rate (LIBOR) is a standard rate
of interest used in international transactions.
---------------------------------------------------------------------------
On balance, the Board believes that a spread of less than 150 basis
points might not be sufficient to assure that many depository
institutions still would have incentives to make private-sector
arrangements to meet potential shifts in the supplies of, and demands
for, liquidity. Furthermore, a spread of 150 basis points probably is
low enough to provide a reasonable backstop if concerns about the
century date change or disruptions associated with the change itself
begin to put strains on funding and credit markets, especially if these
strains are short-lived. The federal funds rate has reached highs in
excess of 150 basis points above the target rate on more than one-third
of the final days of reserve maintenance periods since the beginning of
1994. A spread of 150 basis points is also well within the range of
year-end premiums observed in the commercial paper market in past
years.
Period of Operation
The Board proposed that credit under the Special Liquidity Facility
be available from November 1, 1999, to April 7, 2000. The Board
requested comment on how long the facility should be open, in
particular whether it should begin earlier.
A majority of commenters either expressed general approval of the
facility as described or specifically endorsed the start and stop
dates. However, a significant minority (25 percent) suggested an
earlier start date, and a few commenters suggested either a later
ending date or flexibility on the stop date depending on circumstances.
Among those suggesting an earlier start date, most proposed the
beginning of October, although a few requested September, August, or as
soon as possible. A majority of those advising an earlier opening cited
plans to build up
[[Page 41767]]
vault cash earlier in the fall. More broadly, other commenters stated
that an earlier start date would be a prudent response to the great
uncertainty about demands for liquidity in the fourth quarter,
including the potential for cash withdrawals.
In light of these comments, the Board has determined to make the
facility available beginning October 1, 1999. The facility is meant to
provide assurance to financial institutions that funds will be
available if unforeseen difficulties arise. Given the expressed view
that such assurance would be desirable earlier than proposed, there
appears to be little reason not to open the facility sooner. The Board
has retained the closing date of April 7, 2000, but has specified in
the regulation that at a later time it could move back the closing date
if conditions warrant.
Eligible Borrowers
The Board proposed that credit under the Special Liquidity Facility
would remain discretionary, even though many normal discount window
conditions would not apply. The Board proposed that the Special
Liquidity Facility would be available only to depository institutions
in sound financial condition. For example, under the proposal, it would
not have been available to depository institutions that are
undercapitalized or critically undercapitalized under the standards set
forth in the prompt corrective action provisions of the Federal Deposit
Insurance Act 2 and implementing regulations. 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 3 that discourage the
Reserve Banks from making relatively long-term loans to inadequately
capitalized institutions. Similarly, in the case of credit unions, the
Board proposed that 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 4) of at least
six percent, which qualifies a credit union as adequately capitalized
under that Act.5 With respect to branches and agencies of
foreign banks, the Board proposed that credit under the Special
Liquidity Facility would be available only to a branch or agency 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.
---------------------------------------------------------------------------
\2\ 12 U.S.C. 1831o(b)(1)(E).
\3\ 12 U.S.C. 347b(b).
\4\ 12 U.S.C. 1790d(o)(3).
\5\ 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.
---------------------------------------------------------------------------
Several commenters stated that there may be situations where it
would be appropriate to provide access to the Special Liquidity
Facility for undercapitalized institutions. Four commenters stated that
the Board should permit institutions some liquidity and capital ratio
flexibility during the century date change period, particularly in
light of the possibility that market behavior during the conversion,
such as a ``flight to quality'' inflow of bank deposits or the drawing
down of lines of credit, could create temporary balance sheet
distortions. One commenter stated that denying access to these
institutions could cause a public reaction that would increase the
institution's vulnerability and precipitate customer withdrawals.
Another commenter suggested that, rather than prohibit undercapitalized
institutions from using the facility, the Board could place more
limited controls on undercapitalized institutions that balance the need
to provide emergency funding with measures to prevent the inappropriate
use of those funds, such as restrictions on the purpose and duration of
borrowing and enhanced supervision. Finally, one commenter stated that
the eligibility of U.S. branches and agencies of foreign banks for the
Special Liquidity Facility should be determined by a combination of
supervisory ratings and investment information such as independent
agency ratings.
The credit union industry raised specific concerns. Two commenters
stated that the proposed 6 percent net worth ratio that must be met by
eligible credit unions is unworkable for corporate credit unions, which
are not subject to statutory net worth requirements. One commenter
suggested that the Board leave the determination as to the eligibility
of corporate credit unions to the Reserve Bank or, alternatively, deem
a corporate credit union to be eligible if it meets an appropriate
capital ratio as determined by its primary regulator.6 The
other commenter suggested that the Board simply deem corporate credit
unions to be eligible borrowers. One commenter requested that the Board
lower the net worth requirement for eligible credit unions to 5.5
percent because of the likelihood that expenses associated with
century-date-change preparations may require some credit unions to
reduce their capital. Another commenter suggested that an alternative
to lowering the net worth percentage would be to average the credit
union's capitalization over several reporting periods to determine
eligibility. Another commenter objected to the Board using a statutory
net worth requirement for credit unions that has not yet taken effect
and suggested that the Board establish a definition of ``sound
financial institution'' that would be flexible and take into account a
variety of factors other than capital, such as risk and collateral.
Another commenter suggested that any credit union with reasonable net
worth and adequate collateral should be eligible.
---------------------------------------------------------------------------
\6\ Generally, corporate credit unions are not eligible to
borrow from the discount window unless they hold reserves.
---------------------------------------------------------------------------
An important purpose of the Special Liquidity Facility is to
encourage depository institutions to extend lines of credit over year-
end. The Board has determined, therefore, that its proposed definition
of ``eligible institution,'' which tied eligibility to capital
standards established under the prompt corrective action regimes for
depository institutions, could be unduly constraining. Potentially,
depository institutions that do not meet the minimum requirements to be
adequately capitalized before or due to their borrowing from the
Special Liquidity Facility may still be deemed in sound financial
condition by the lending Reserve Bank. In addition, the proposed
capital standards may not be applicable to certain institutions, such
as corporate credit unions. To provide flexibility to the Reserve Banks
in administering the Special Liquidity Facility, in the final rule the
Board has deleted the proposed capital standards from the definition of
``eligible institution.'' The Special Liquidity Facility will be
available to depository institutions, including credit unions, that the
lending Reserve Bank deems to be in sound financial condition. The
borrowing limitations in Sec. 201.4(a) for institutions that are less
than adequately capitalized will continue to apply.
The Board has made a corresponding change in Sec. 201.7, which
applies the Regulation A lending provisions to branches and agencies of
foreign banks. As in the case of domestic banks, the minimum capital
levels that would be required for branches and agencies of foreign
banks under the Basle Capital Accord, while useful guides, may be
unduly constraining. There may be cases when an institution is in sound
financial condition even though it does not meet these minimum
guidelines.
[[Page 41768]]
Conversely, for both domestic and foreign institutions, even where the
institution meets minimum capital requirements, the lending Reserve
Bank may determine that the institution is not in sound financial
condition and therefore is ineligible to borrow under the Special
Liquidity Facility.
When determining whether an institution is in sound financial
condition, the Board or Reserve Bank may discuss the 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. Institutions that had been adequately
capitalized and in sound financial condition but whose capital ratios
fell below minimum regulatory standards would be expected to consult
with their lending Reserve Bank. In judging whether such a borrower
remained in sound financial condition and should continue to have
access to the facility, the Reserve Bank would take into account
whether the decline owed to temporary balance sheet distortions
associated with the century date change, as well as the financial
condition of the institution before those distortions occurred.
Collateral.
The Board proposed that 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. Several commenters stated that the
Board should expand the types of collateral that are eligible to be
pledged for a loan under the facility. Commenters stated that they
would like to pledge collateral held at the pledgor bank, eligible
securities maintained at Euroclear, bank debentures and certificates of
deposit (with a generic hair-cut of 15 percent), GNMA and municipal
securities, corporate securities, and shares of mutual funds that
invest in allowable fixed-income securities (which are commonly held by
credit unions). One international bank commenter requested that it be
able to use collateral it maintains in the United Kingdom, possibly by
pledging it through the Bank of England, which would hold it on account
for the Reserve Bank. Two commenters suggested that the Board
informally encourage Reserve Banks to be flexible, expeditious, and
practical in their consideration of additional asset classes, hair-cuts
applied in the valuation of collateral, and methods of perfection. One
commenter stated that the collateral procedural requirements should not
be as cumbersome as those for other discount window credit. Another
commenter asked for clarification as to whether collateral will be
fungible for purposes of borrowing under existing discount window
arrangements and the Special Liquidity Facility.
The collateral requirements for Special Liquidity Facility credit
will be identical to those for other discount window loans. 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. 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. If many institutions
that have not made collateral arrangements ahead of time request credit
simultaneously, the resulting congestion could prevent institutions
from obtaining credit on the day they request it. Federal Reserve staff
strive to accommodate the needs of depository institutions seeking
access to discount window credit. Staff will work aggressively to
expand the range of acceptable collateral and to make collateral
procedures more expeditious and flexible. In addition, as there will be
no separate borrowing agreements, those institutions that arrange, or
have already arranged, access to adjustment credit will have access to
Special Liquidity Facility credit, provided they are eligible
institutions. Similarly, pre-positioned collateral will be available to
secure either type of credit.
One commenter asked for clarification on additional operational
issues regarding collateral, such as what the minimum notification
period would be for using the facility on a collateral-by-collateral-
type basis, whether borrowers will be able to substitute collateral,
and what the acceptable delivery mechanism would be (delivery-versus-
payment, tri-party, or held-in-custody). Another commenter requested
that the Reserve Banks and the appropriate FHLBs coordinate on the
terms of collateral agreements to enable FHLB members to determine
their available collateral in the most efficient manner. Institutions
with questions about specific collateral arrangements should contact
their local Federal Reserve Bank.
One commenter stated that many banks have already pledged many of
their assets to secure public deposits or to the FHLBs, leaving little
available to pledge to the Reserve Banks. This commenter suggested that
the Reserve Banks could waive collateral requirements for well-
capitalized institutions without meaningfully increasing their credit
risk. Consistent with the Federal Reserve Act and historical practice,
the Reserve Banks will continue to require that all loans be
collateralized fully, even though the Board recognizes that some
borrowers present less credit risk than others.
Differences from Adjustment Credit.
Special Liquidity Facility credit, as proposed and as adopted,
would differ from adjustment credit in several ways meant to provide
greater flexibility and increase institutions' willingness to borrow.
Borrowers will not be required to exhaust alternative liquidity
sources, nor will the use of the funds be limited in the same way as
funds from adjustment credit. Furthermore, there will be no requirement
that credit be repaid expeditiously; credit can remain outstanding
until the program expires. Reserve Banks will not monitor or require
additional reports of borrowers under the Special Liquidity Facility.
Supervisory authorities may need to assess the condition of the
borrowing institution if the use of Special Liquidity Facility credit
is accompanied by signs of financial trouble.
One commenter noted that Sec. 201.6(d) of Regulation A prohibits an
institution from acting (without permission) as a medium or agent of
another institution in receiving Federal Reserve credit. The commenter
asked that the Board clarify that Sec. 201.6(d) does not preclude
eligibility for a bank that is a net provider of funds to other
institutions or needs to use the Special Liquidity Facility because of
an unexpected drawdown on a line of credit provided to another
institution. As the purpose of the Special Liquidity Facility is to
supply additional liquidity to the markets, this restriction on the use
of the funds should not apply. The Board has revised Sec. 201.6(d) to
clarify that it does not apply to depository institutions that receive
credit under the Special Liquidity Facility.
Four commenters requested clarification as to whether an
institution may make drawings from the Special Liquidity Facility at
any time during the proposed period and whether the term of a borrowing
must be stated upon drawing or whether the drawing may be made on an
open basis. One of these commenters noted that section 10B of the
Federal Reserve Act limits maturities on advances to four months,
unless the advances are secured by mortgage loans covering one-to-four
family residences. One commenter asked how often the facility could be
accessed and whether there were any
[[Page 41769]]
minimum or maximum borrowing amounts. Another commenter asked the Board
to clarify that advances under the facility may be prepaid without
penalty.
Borrowers will be able to adjust the amount they borrow as
frequently as they desire, although all outstanding credit must be
fully collateralized. Loans can be taken down and repaid at the
borrowers' discretion at any time while the facility is operating,
consequently there can be no penalty for early repayment. Technically,
all discount window loans are payable on demand, and accordingly their
maturities do not exceed four months.7
---------------------------------------------------------------------------
\7\ See the Board's interpretation on eligibility of demand
paper for discount and as security for advances by Reserve Banks, 12
CFR 201.107.
---------------------------------------------------------------------------
One commenter stated that the Board should better define the
circumstances for determining when an institution may borrow through
the Special Liquidity Facility and when it may borrow adjustment
credit. A credit union commenter asked for clarification that once the
institution's application for discount window access is approved, it
may access both adjustment credit and the Special Liquidity Facility.
This commenter also requested clarification that a borrower need not
consider the Special Liquidity Facility as a funding option that must
be exhausted before requesting adjustment credit.
Borrowing under the facility will not be considered a source of
funds that would need to be exhausted before obtaining adjustment
credit. Furthermore, institutions that experience 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.
One commenter stated that the Federal Reserve will need to address
a wide range of operational issues before implementing the Special
Liquidity Facility, such as the loan request and approval process,
reliance on the 21-day period for perfection of instruments under
borrower-in-custody arrangements, and modifications to automated
systems. As noted above, specific collateral arrangements should be
worked out with the local Federal Reserve Bank.
Other Regulatory and Market Concerns.
One commenter stated that the Board should consider temporarily
suspending certain provisions of the Federal Reserve Act, such as
section 23A, over the century date change period and should expand the
types of markets that it uses for open-market purchases to include, for
example, asset-backed securities markets. Another commenter stated that
the Board should review its payment system risk policy with a view
towards increasing the net debit cap for international banks, given the
significant changes in the market and in payments system practices
since the caps were adopted in 1990. Another commenter stated that the
Reserve Banks should pay interest on deposits of at least 100 basis
points. One commenter also requested that the Federal Reserve take
steps to help banks respond to market fluctuations by adjusting its
lending policies and by allowing late reserve adjustments.
The Board is taking and will continue to take actions that it
determines are appropriate in order to ensure that the banking system
and financial markets continue to operate safely and soundly, with
sufficient liquidity, during the century date change period. If
problems arise related to certain statutory or regulatory requirements,
the Board will consider at that time the appropriate action. Certain
actions, such as paying interest on accounts at Reserve Banks, are not
authorized by statute.
Finally, one commenter suggested that the Reserve Banks revise
Operating Circular 10 (the lending circular) to eliminate the provision
that requires a correspondent bank to object to any debit to its
account for the amount of a loan repayment due from the borrower to the
Reserve Bank within one hour of the time the payment is due or else the
payment is irrevocable. The commenter stated that this provision
requires the correspondent to become the unintended purchaser of the
loan from the Reserve Bank without benefit of the collateral that had
secured the loan. The commenter stated that neither the correspondent
nor the Reserve Bank would face increased risk if the circular were to
eliminate the notion of irrevocability of an unchallenged debit and
require the correspondent to transfer the loan repayment amount
affirmatively to the Reserve Bank. Arrangements regarding correspondent
relationships should be worked out with the local Federal Reserve Bank.
Educational Outreach. One commenter urged the Board to take a
leadership role on providing a flexible regulatory response to possible
temporary declining capital ratios due to century-date-change
activities and to educate rating agencies and the Securities Exchange
Commission that such temporary declines near year-end are not
necessarily a sign of weakened condition. One commenter urged the Board
and other banking agencies to expand Year 2000 outreach efforts to
consumers in order to combat emotional overreaction due to unfounded
rumors and sensational media stories. Another commenter recommended
that the Federal Reserve actively educate depository institutions about
the Special Liquidity Facility. The Board has undertaken a number of
initiatives to provide information on issues related to the century
date change. More information is available on the Board's web
site.8
---------------------------------------------------------------------------
\8\ See<http://www.federalreserve.gov/y2k/.
---------------------------------------------------------------------------
Regulatory Flexibility Act Certification
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 605(b)), the Board certifies that the 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.
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 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 a depository institution that is in
sound financial condition in the judgment of the lending Federal
Reserve Bank.
(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
[[Page 41770]]
Banks may extend credit between and including October 1, 1999, and
April 7, 2000, or such later date as determined by the Board, 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. 201.6, paragraph (d) is revised to read as follows:
Sec. 201.6 General requirements.
* * * * *
(d) Indirect credit for others. Except for depository institutions
that receive credit under the Special Liquidity Facility described in
Sec. 201.3(e), no depository institution shall act as the medium or
agent of another depository institution in receiving Federal Reserve
credit except with the permission of the Federal Reserve bank extending
credit.
5. 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 in the
judgment of the lending Federal Reserve Bank.
6. In Sec. 201.52, the heading is revised and a new paragraph (c)
is added to read as follows:
Sec. 201.52 Other 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, July 27, 1999.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 99-19632 Filed 7-30-99; 8:45 am]
BILLING CODE 6210-01-P