[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]



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 Rules and Regulations
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  Federal Register / Vol. 64, No. 147 / Monday, August 2, 1999 / Rules 
and Regulations  

[[Page 41765]]


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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: Final rule.

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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.
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    \1\ The London Interbank Offered Rate (LIBOR) is a standard rate 
of interest used in international transactions.
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    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.
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    \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.
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    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