[Federal Register Volume 67, Number 101 (Friday, May 24, 2002)]
[Proposed Rules]
[Pages 36544-36551]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-12781]


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FEDERAL RESERVE SYSTEM

12 CFR Part 201

Regulation A; Docket No. R-1123


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 of Governors is publishing for comment a proposed 
amendment to Regulation A that would replace the existing adjustment 
and extended credit programs with new discount window programs called 
primary credit and secondary credit, respectively. This proposed 
restructuring of Federal Reserve credit programs is designed to improve 
the functioning of the discount window and does not represent a change 
in the stance of monetary policy. The proposed rule also would 
reorganize and streamline existing provisions of Regulation A. The 
Board solicits comment on all aspects of the proposal.

DATES: Comments on the proposed rule must be received not later than 
August 22, 2002.

ADDRESSES: Comments should refer to docket number R-1123 and should be 
sent to Ms. Jennifer J. Johnson, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, NW., 
Washington, DC, 20551 or mailed electronically to 
[email protected]. Comments addressed to Ms. Johnson 
also may be delivered between 8:45 a.m. and 5:15 p.m. to the Board's 
mail facility in the west courtyard of the Eccles Building, located on 
21st Street between Constitution Avenue and C Street, NW. Members of 
the public may inspect comments in accordance with the Board's Rules 
Regarding the Availability of Information (12 CFR part 261) in Room MP-
500 of the Martin Building on weekdays between 9 a.m. and 5 p.m.

FOR FURTHER INFORMATION CONTACT: Brian Madigan, Deputy Director (202/
452-3828) or William Nelson, Senior Economist (202/452-3579), Division 
of Monetary Affairs; or Stephanie Martin, Assistant General Counsel 
(202/452-3198) or Adrianne Threatt, Senior Attorney (202/452-3554), 
Legal Division; for users of Telecommunication Devices for the Deaf 
(TDD) only, contact 202/263-4869.

SUPPLEMENTARY INFORMATION:

Background

Current Credit Programs of Reserve Banks and Their Relationship to 
Monetary Policy and Open Market Operations

    Under existing Regulation A, the Reserve Banks may make credit 
available to depository institutions at the discount window by making 
advances secured by acceptable collateral or by discounting paper that 
meets the requirements of the Federal Reserve Act. Reserve Bank credit 
usually takes the form of an advance.
    Reserve Banks make credit available at the discount window through 
three credit programs: adjustment credit, seasonal credit, and extended 
credit. Adjustment credit is available for short periods of time at a 
basic discount rate that, over the past decade, typically has been 25 
to 50 basis points below the market rates that apply to overnight 
loans, as indexed by the federal funds rate. Reserve Banks also extend 
seasonal credit for longer periods than permitted under the adjustment 
credit program to help smaller depository institutions meet funding 
needs that result from expected patterns in their deposits and loans. 
Finally, Reserve Banks may provide extended credit to depository 
institutions where similar assistance is not reasonably available from 
other sources. The rates applied to seasonal and extended credit are at 
or above the basic discount rate.
    When implementing monetary policy, the Federal Reserve relies 
primarily on open market operations to supply reserves to the banking 
system and currency to the public and to make short-run adjustments in 
reserves. However, lending to depository institutions through the 
discount window aids the Federal Reserve's open market operations in 
two important ways. First, discount window lending provides additional 
reserves to the overall banking system when the supply of reserves 
provided through open market operations falls short of demand. Second, 
discount window lending provides a temporary source of reserves and 
funding to financially sound individual depository institutions that 
have experienced an unexpected shortfall in reserves or funding. 
Discount window credit permits such an institution to make payments 
without incurring an overdraft in its Federal Reserve account or 
failing to meet its reserve requirements. Historically the Federal 
Reserve System has relied on the adjustment credit program to 
accomplish these two objectives.
    The discount window also can, at times, serve as a useful tool for 
promoting financial stability by providing temporary funding to 
depository institutions that are experiencing significant financial 
difficulties. The provision of credit to a troubled depository 
institution can help to prevent the sudden collapse of the institution 
by easing liquidity strains while the institution is making a 
transition to more sound footing, or by facilitating an orderly closure 
of the institution. An institution obtaining credit in such a situation 
must be monitored appropriately to ensure that it does not take 
excessive risks in an attempt to return to profitability and does not 
use central bank credit in a manner that would increase costs to the 
deposit insurance fund of resolving the institution if resolution were 
to become necessary. Historically, the Federal Reserve System has 
relied on extended credit to aid depository institutions experiencing 
significant financial difficulties.

The Rationale for Changing the Basic Framework Through Which Reserve 
Banks Extend Credit

    A below-market discount rate creates incentives for institutions to 
obtain adjustment credit to exploit the spread between the discount 
rate and the market rates for short-term loans. Regulation A therefore 
provides that a Reserve Bank cannot extend adjustment credit to a 
depository institution until

[[Page 36545]]

the institution exhausts other sources of funds. Regulation A also 
provides that recipients may not use adjustment credit to finance sales 
of federal funds.
    Because of the restrictions necessitated by a below-market discount 
rate, a substantial degree of Reserve Bank administration is associated 
with adjustment credit. In particular, the Reserve Bank may need to 
review each prospective borrower's funding situation to establish that 
the borrower has exhausted other reasonably available sources of funds 
and that the reason for borrowing is appropriate. Because that 
evaluation necessarily is subjective, achieving a reasonable degree of 
consistency in credit administration across the System is difficult.
    The administration of and restrictions on discount window credit 
create a burden on depository institutions that reduces their 
willingness to seek credit at the discount window. In addition, the 
rules governing discount window credit have proved difficult to 
explain, and depository institutions often have cited uncertainty about 
their borrowing privileges as a disincentive to seek credit. Depository 
institutions also have expressed concern about the requirement that 
borrowers fully utilize other sources of funds before borrowing 
adjustment credit. Institutions have expressed concern that turning to 
the window after signaling in the market their need for funds could be 
interpreted as a sign of weakness, particularly during periods of 
financial stress. Concerns such as these have limited the willingness 
of depository institutions to borrow at the discount window, even in 
circumstances of extremely tight money markets where such borrowing 
would have been appropriate. The reluctance to borrow in turn has 
limited the discount window's effectiveness in buffering shocks to 
money markets.
    In light of the drawbacks associated with the current below-market 
discount window programs, the Board believes that the interests of 
depository institutions, the Federal Reserve System, and the economy 
more generally would be served more effectively by an above-market 
lending program. Under the Board's proposed rule, Reserve Banks would 
extend credit under the primary credit program to institutions the 
Reserve Banks determine to be generally sound. Primary credit usually 
would be extended at an above-market rate, which should essentially 
eliminate the incentive for institutions to seek discount window credit 
simply to exploit the usual spread between the discount rate and short-
term market rates. Eliminating this incentive would reduce sharply the 
need for administration regarding the extension and use of Federal 
Reserve credit. The streamlined eligibility criteria also should 
encourage greater uniformity in administration of the discount window 
across Federal Reserve districts. By minimizing a Reserve Bank's need 
to question potential borrowers, not requiring that an institution 
first attempt to borrow elsewhere, making the borrowing program 
significantly more transparent, and limiting extensions of primary 
credit to generally sound financial institutions, the proposed above-
market lending program should reduce depository institutions' 
reluctance to borrow when money markets tighten sharply. As a result, 
the discount window should become a more effective policy instrument.
    The Board reiterates that replacing the current below-market 
adjustment credit program with an above-market program would not signal 
a shift in the stance of monetary policy. Rather, the proposed changes 
represent a broad structural change that should enable the discount 
window to operate more efficiently as a source of funds for individual 
depository institutions and as a mechanism for implementing the policy 
objectives of the Federal Reserve System. The proposed structure of 
providing credit at the margin at above-market interest rates also 
would be similar to mechanisms adopted by other major central banks.

Section-by-Section Analysis

The Proposed Changes to the Discount Lending Framework--[sect][sect] 
201.4 and 201.51

    The Board proposes to replace the adjustment credit with a new 
lending program called primary credit and the extended credit program 
with a new program known as secondary credit. Although the proposed 
regulation retains the seasonal credit program with minor revisions, as 
discussed in more detail below the Board specifically requests comment 
on whether a seasonal credit program remains necessary and, if so, 
whether the interest rate on seasonal credit would more appropriately 
be set at the primary discount rate. As required by the Federal Reserve 
Act, all advances made under the proposed discount lending programs 
would have to be adequately collateralized. The Reserve Banks' 
collateral policies would be unchanged and they would continue to 
accept a broad range of financial assets as collateral for discount 
window loans.
    The substantive changes to the lending programs are contained in 
[sect] 201.4 of the proposed rule, which replaces existing [sect] 
201.3. The rates that apply to the proposed lending programs are 
described in [sect] 201.51, which combines and replaces existing 
[sect][sect] 201.51-201.52.
Primary Credit
    Primary credit would replace adjustment credit, would be extended 
on a very short-term basis (usually overnight) at an above-market rate, 
and ordinarily would be available to generally sound depository 
institutions with little or no administrative burden on the borrower or 
the Reserve Banks. A Reserve Bank also could extend primary credit with 
maturities up to a few weeks to a depository institution if the Reserve 
Bank finds that the institution is in generally sound condition and 
cannot obtain such credit in the market on reasonable terms. The Board 
expects that institutions receiving longer-term primary credit would be 
relatively small institutions that lack access to national money 
markets.
    Although the primary credit program is designed to make short-term 
credit available as a backup source of liquidity to generally sound 
institutions, a Reserve Bank is not obligated to extend primary credit. 
A Reserve Bank therefore may choose not to lend to a generally sound 
depository institution if the Reserve Bank determines that doing so 
would be inconsistent with the purposes of the primary credit program.
    Section 201.4(a) of the proposed rule describes the primary credit 
program, and [sect] 201.51(a) sets forth the rate that applies to 
primary credit.
1. Interest Rate Applicable to Primary Credit
    The interest rate on primary credit ordinarily would be above 
short-term market interest rates, including the target federal funds 
rate, and would be set by the boards of directors of the Reserve Banks 
subject to review and determination by the Board of Governors. A 
substantial spread between the discount and market rates would 
encourage depository institutions to use primary credit only to meet 
short-term, unforeseen needs. If the spread were too wide, however, the 
primary discount rate would not cap the federal funds rate at a 
reasonable level above the rate targeted by the Federal Open Market 
Committee (FOMC).
    The Board proposes to recommend that the boards of directors of the 
Reserve Banks, subject to the Board's review and determination, 
initially establish a primary discount rate that is

[[Page 36546]]

100 basis points above the FOMC's then-prevailing target for the 
federal funds rate. A spread of 100 basis points would be similar to 
the spreads employed by other central banks and likely would place the 
primary discount rate somewhat above the alternative cost of overnight 
funds for eligible depository institutions. The Board believes that 
public comment could help inform the Federal Reserve System's choice of 
the initial spread between the federal funds and discount rates and 
assist the boards of directors of the Reserve Banks when they establish 
rates subsequently. The Board therefore specifically solicits comment 
regarding the interest rate spread.
    After establishment of the initial primary discount rate, the 
Federal Reserve System would change that rate through a process 
identical to the existing discretionary procedure for changing the 
basic discount rate. The boards of directors of the Federal Reserve 
Banks would establish a primary discount rate and other discount rates 
every two weeks subject to review and determination by the Board of 
Governors, as required by the Federal Reserve Act. The primary discount 
rate presumably would move broadly in line with the target federal 
funds rate, much as the basic discount rate does currently.
2. Eligibility for Primary Credit
    Under the proposed regulation, only depository institutions deemed 
generally sound in the judgment of the Reserve Bank would be eligible 
to obtain primary credit. Reserve Banks would classify depository 
institutions with borrowing agreements already on file as either 
eligible or ineligible for primary credit before a primary credit 
program takes effect and would notify each such institution of its 
status. A new applicant for Federal Reserve credit would be notified of 
its eligibility after filing borrowing documents with the appropriate 
Federal Reserve Bank. The Reserve Banks would notify an institution 
promptly of any change in the institution's eligibility status. An 
institution's eligibility status, which would be based in part on that 
institution's confidential supervisory and examination information, 
would be considered confidential information and the Federal Reserve 
System would handle it accordingly.
    The Board expects that the Reserve Banks would adopt on a System-
wide basis uniform guidelines for judging the degree of an 
institution's financial soundness and thus its eligibility for primary 
credit. The Board envisions that the guidelines for determining 
eligibility would be based primarily on supervisory ratings, but 
supplementary information, such as ratings issued by major rating 
agencies, spreads on subordinated debt, and information from 
supervisory exams in progress, also would be considered. The Board 
further expects that the majority of depository institutions would be 
eligible for the primary credit program under such guidelines.
    The Board anticipates that Reserve Banks initially would adopt 
guidelines under which domestically chartered depository institutions 
with composite CAMELS ratings of 1 or 2 and U.S. branches and agencies 
of foreign banking organizations with Strength of Support Assessment 
(SOSA) composite rankings of 1 would be eligible for primary credit, 
unless supplementary information suggested that the financial condition 
of the depository institution had deteriorated since the most recent 
exam. Similarly, the Board expects that under the initial guidelines 
institutions rated CAMELS 3 or SOSA 2 would be eligible for primary 
credit if supplementary information suggested that they were generally 
sound. However, the funding situation of such institutions seeking 
credit would be reviewed and monitored more closely than that of 
stronger institutions. The Board expects that institutions rated CAMELS 
4 or SOSA 3 would be ineligible for primary credit except in rare 
circumstances, such as an ongoing examination that indicated a 
substantial improvement in condition. The Board further anticipates 
that institutions rated CAMELS 5 would in no case be eligible for 
primary credit and could obtain only secondary credit.
    Because lending to troubled institutions would be subject to 
careful monitoring, the expected eligibility criteria would be 
consistent with the intent of the guidelines for discount window 
lending included in section 10B(b) of the Federal Reserve Act, as added 
by the Federal Deposit Insurance Corporation Improvement Act. The 
criteria also would be consistent with the guidelines used by Federal 
Reserve Banks to determine institutions' access to daylight credit in 
the Payments System Risk policy. In general, the depository 
institutions that qualify for access to daylight credit would qualify 
for primary credit, and those that would not qualify for daylight 
credit would be restricted to secondary credit.
    A depository institution that meets the eligibility criteria 
adopted by the Reserve Banks would not be required to exhaust other 
reasonable available sources of funds before obtaining primary credit. 
The removal of this requirement is consistent with the overall 
reduction in discount window administration under the proposed new 
discount window structure. In addition, depository institutions that 
receive primary credit would be free to sell federal funds to others. 
This would enhance the ability of the primary credit rate to serve as a 
cap on the federal funds rate when money markets tighten. The Board 
would encourage financially sound institutions to use primary credit to 
fund sales of federal funds if such transactions were in their 
financial interest.
3. Benefits of a Primary Credit Program
    Because of the reduced administration and corresponding reduction 
in the reluctance of depository institutions to borrow, the Board 
expects that primary credit would serve as a more effective safety 
valve for the banking system and a backup source of liquidity for 
individual depository institutions that are financially sound.
    The proposal to adopt a primary credit program also is an aspect of 
the Federal Reserve's ongoing planning for contingencies. The Federal 
Reserve System expects to establish special procedures through which 
the System could lower discount rates quickly in an emergency. If, as 
the Board intends, the availability of primary credit significantly 
reduces the reluctance of depository institutions to use the discount 
window, the System should be able to cap the federal funds rate near 
the target during a crisis by reducing the primary discount rate to a 
level close to the federal funds target rate. During a financial market 
crisis, the proposed discount window structure therefore would provide 
a means of preventing an undue tightening of money markets if 
depository institutions' demands for excess reserves rose sharply, if 
disruptions inhibited the flow of funds through the banking system, or 
if the Federal Reserve's ability to carry out open market operations 
were impaired.
    In addition, the Board expects that moving to an above-market 
primary credit program would be beneficial to the Federal Reserve 
System as the mechanisms by which the Board implements monetary policy 
evolve. For example, if Congress authorizes the Federal Reserve Banks 
to pay interest on reserve balances, an above-market lending program 
would allow the Reserve Banks to avoid lending to depository 
institutions at a below-market rate while paying interest to those 
institutions at a market-related rate. Also, if the level of required 
operating balances resumes the substantial downward decline

[[Page 36547]]

experienced for much of the last decade, a lending program with 
appreciably less administration could enhance the day-to-day 
implementation of monetary policy. A decline in operating balances 
could lead to increased volatility in the federal funds rate, and the 
availability of reserves from an above-market lending facility would 
serve to limit the increase in volatility.
Secondary Credit
    Secondary credit would replace extended credit and would be 
available to depository institutions that do not qualify for primary 
credit. Because some institutions that currently are eligible for 
adjustment credit would not qualify for primary credit, secondary 
credit potentially would be used more often than has the extended 
credit program. The text of the proposed regulation therefore seeks to 
eliminate the focus on longer-term credit extensions in the existing 
extended credit program and to recognize the somewhat broader class of 
borrowing situations that a Reserve Bank may handle under the secondary 
credit program.
    Section 201.4(b) of the proposed rule describes the secondary 
credit program, and [sect] 201.51(b) describes the interest rate that 
applies to secondary credit.
    Under the proposal, Federal Reserve Banks may extend secondary 
credit to meet temporary funding needs of an institution if such a 
credit extension would be consistent with the institution's timely 
return to a reliance on market funding sources. A Reserve Bank also may 
extend secondary credit if it determines that such credit would 
facilitate the orderly resolution of serious financial difficulties of 
the borrowing institution. When extending secondary credit to an 
undercapitalized or critically undercapitalized depository institution, 
a Reserve Bank also must observe the requirements set forth at proposed 
[sect] 201.5. The interest rate on secondary credit would be set by 
formula 50 basis points above the primary discount rate. This higher 
rate reflects the less-sound condition of borrowers of secondary 
credit.
Seasonal Credit
    Section 201.4 of the proposed rule makes only minor revisions to 
the existing seasonal credit provisions of Regulation A. The seasonal 
credit interest rate is based on short-term market rates, and 
historical interest rate relationships suggest that the rate for 
seasonal credit usually will be below the primary credit rate. Sections 
201.4 and 201.51(c) of the proposed rule, which discuss the rate 
applicable to seasonal credit, would not contain existing language 
requiring the seasonal credit rate to be at least as high as the 
primary credit rate. In addition, the System for some time has not 
required that a seasonal credit borrower demonstrate that it could not 
obtain similar assistance from special industry lenders, and the 
proposed rule accordingly deletes this requirement.
    The seasonal credit program originally was designed to address the 
difficulties that relatively small banks with substantial intra-yearly 
swings in funding needs faced because of a lack of access to the 
national money markets. Reserve Banks traditionally have extended 
seasonal credit to small institutions that demonstrate significant 
seasonal swings in their loans and deposits. However, funding 
opportunities for smaller depository institutions appear to have 
expanded significantly over the past few decades as a result of deposit 
deregulation and the general development of financial markets. The 
Board therefore specifically solicits comment on whether small 
depository institutions still lack reasonable access to funding 
markets; on the desirability of eliminating the seasonal lending 
program; and on the appropriate setting of the seasonal lending rate, 
particularly in view of the proposed establishment of a primary credit 
program with an above-market rate. Depending on the comments received, 
the Board may decide to adjust the rate applicable to seasonal credit 
or to eliminate the seasonal credit program altogether.

Reorganization of and Proposed Changes to Other Provisions of 
Regulation A

    In addition to replacing the adjustment and extended credit 
programs with primary and secondary credit programs, respectively, the 
Board also proposes to reorganize much of existing Regulation A in 
order to streamline the text of the rule and make it easier to read and 
understand. In addition, the Board proposes to delete certain 
provisions of existing Regulation A that are obsolete or superfluous.
Deletion of Provisions Concerning the Century Date Change Special 
Liquidity Facility (SLF)
    The Board previously amended Regulation A so that depository 
institutions would have access to an SLF from October 1, 1999, to April 
7, 2000, to ease liquidity pressures unique to the century date change 
period. The SLF for U.S. depository institutions is described at 
existing [sect] 201.3(e), and the circumstances under which a U.S. 
branch or agency of a foreign bank could use the facility are described 
at existing [sect] 201.7(b). Sections 201.2(j)-(k) define two terms--
``eligible institution'' and ``targeted federal funds rate,'' 
respectively--that pertain only to the SLF provisions. Because the SLF 
is no longer in effect, the Board proposes to delete each of the four 
provisions discussed above. As discussed in more detail in connection 
with proposed [sect] 201.3(d), the Board proposes to delete a portion 
of existing [sect] 201.6(d) that allows a depository institution to use 
credit obtained from the SLF to fund sales of federal funds.

Section 201.1 Authority, Purpose and Scope

    The Board proposes to amend the existing authority citations at 
[sect] 201.1(a) to include sections 11(i)-11(j) and 14(d) of the 
Federal Reserve Act. Sections 11(i)-(j) provide the Board with 
rulemaking authority and general supervisory authority over the Reserve 
Banks, respectively, and section 14(d) authorizes the Reserve Banks, 
subject to the review and determination of the Board, to establish 
discount rates.
    As in the existing regulation, [sect] 201.1(b) of the proposed rule 
describes the purpose and scope of the Regulation A and states that the 
regulation governs lending by Reserve Banks to depository institutions 
and others. To gather all the provisions concerning the scope of 
Regulation A into one section, the proposed rule incorporates language 
from existing [sect] 201.7(a) regarding the circumstances under which 
U.S. branches and agencies of foreign banks are subject to the 
regulation.

Section 201.2--Definitions

    This section would remain unchanged except for the deletion of five 
definitions. As discussed above, [sect][sect] 201.2(j)-(k) contain 
definitions that are unnecessary because they relate only to the SLF. 
The other three terms the Board proposes to delete are liquidation 
loss, increased loss, and excess loss, found at existing [sect][sect] 
201.2(d)-(f), respectively.
    Liquidation loss and increased loss are used to derive the term 
excess loss, which is the amount the Board would owe the FDIC under 
section 10B(b) of the Federal Reserve Act if outstanding Reserve Bank 
advances to a critically undercapitalized depository institution 
increased the FDIC's cost of liquidating that institution. Excess loss, 
the only one of these three terms used elsewhere in the regulation, 
appears in existing [sect] 201.4(c). That section states that the Board 
would assess a Reserve Bank for any excess loss attributable to 
advances made by that Reserve Bank and

[[Page 36548]]

discusses the procedure by which the Board would calculate the amount 
to be assessed.
    The Board believes the regulation would be less cumbersome but no 
less accurate if the assessment section incorporated the concept of 
excess loss by simply cross-referencing section 10B(b) of the Federal 
Reserve Act. Although the existing definitions explain accurately and 
in detail how the Board would calculate the excess loss, they produce 
the same result required by section 10B(b) of the statute.

Section 201.3 General Requirements Governing Extensions of Credit

    This section would prescribe the Board's rules governing a Federal 
Reserve Bank's extension of credit. This section would permit Federal 
Reserve Banks to extend credit in the form of an advance or discount 
and would discuss requirements that both the Reserve Banks and the 
depository institutions receiving credit must observe. The text of 
proposed [sect] 201.3 combines in one place all the existing provisions 
of Regulation A that relate to each of these topics.
    Proposed paragraph (a) of [sect] 201.3 would consolidate all the 
existing provisions of Regulation A concerning a Reserve Bank's 
authority to extend credit. Proposed [sect] 201.3(a) mostly contains 
existing text from [sect] 201.5 and provides that a Reserve Bank may 
extend credit to a depository institution in the form of an advance or 
a discount of certain types of paper described in the Federal Reserve 
Act. Like existing [sect] 201.5, the proposed section states that 
credit to depository institutions generally will take the form of an 
advance but preserves a Reserve Bank's discretion to lend through 
discounting eligible paper if the Reserve Bank determines that a 
discount would be more appropriate for a particular depository 
institution. The proposed rule would delete existing [sect] 201.8, 
which provides that a Reserve Bank may discount paper for an 
institution that is part of the farm credit system, and instead would 
discuss that authority at proposed [sect] 201.3(a)(3). Rather than 
providing the lengthy discussion at existing [sect] 201.8, proposed 
[sect] 201.3(a)(3) simply cross-references section 13A of the Federal 
Reserve Act, which authorizes Reserve Banks to discount paper for such 
institutions.
    Proposed [sect] 201.3(b) contains the text of existing [sect] 
201.9, which states that a Reserve Bank has no obligation to make, 
increase, renew, or extend any advance or discount to a depository 
institution.
    Proposed [sect] 201.3(c) gathers in one place the existing 
provisions of Regulation A concerning the requirements a Reserve Bank 
must observe when it does extend credit. Section 201.3(c)(1) contains 
text from existing [sect] 201.4(d) providing that a Reserve Bank should 
ascertain whether an institution is undercapitalized or critically 
undercapitalized before extending credit to that institution. This 
section adds text stating that, if the institution is undercapitalized 
or critically undercapitalized, the Reserve Bank must follow special 
lending procedures. These procedures are specified in proposed [sect] 
201.5, which contains the text of current [sect] 201.4 and is discussed 
in more detail below.
    Proposed [sect][sect] 201.3(c)(2)-(3) include text from existing 
[sect][sect] 201.6(b)-(c) regarding a Reserve Bank's duty to require 
any information it deems appropriate to ensure the acceptability of 
assets tendered as collateral or for discount, to ensure that credit is 
used consistent with Regulation A, and to keep itself informed of the 
general character and amount of loans and investments of a depository 
institution as required by section 4(8) of the Federal Reserve Act.
    Proposed [sect] 201.3(d) consists of existing [sect] 201.6(d), with 
revisions, regarding how a depository institution may use Federal 
Reserve credit. In existing Regulation A, only depository institutions 
that received credit under the century date change SLF were permitted 
to use Federal Reserve credit to fund sales of federal funds without 
permission of the Reserve Bank extending the credit. Because the SLF no 
longer is in effect, the Board would delete the language that pertains 
to credit obtained through that facility. Instead, as explained more 
fully above in the section discussing primary credit, proposed [sect] 
201.3(d) would permit an institution that receives primary credit to 
use that credit to fund sales of federal funds without Reserve Bank 
permission. Recipients of secondary or seasonal credit would continue 
to need Reserve Bank permission to use Reserve Bank credit to fund 
sales of federal funds.
    The Board proposes to delete existing [sect] 201.6(a), which 
provides that a depository institution may not use Federal Reserve 
credit as a substitute for capital. Although the Board continues to 
believe this to be an appropriate policy, the Board believes that other 
provisions of the statutes and regulations that it administers address 
this issue. Thus, the Board sees no need to retain this provision in 
Regulation A.

Section 201.5 Limitations on Availability and Assessments

    The existing text of [sect] 201.4 would be redesignated as [sect] 
201.5, with technical revisions. This section incorporates the 
limitations on advances to an undercapitalized or critically 
undercapitalized depository institution set forth in section 10B(b) of 
the Federal Reserve Act and also applies those limitations to discounts 
for such institutions. In addition, [sect] 201.5 discusses section 
10B(b)'s requirement that the Board pay a specified amount to the FDIC 
if a Reserve Bank advance to a critically undercapitalized depository 
institution increases the loss the FDIC incurs when liquidating that 
institution. The existing regulation explains in detail through the 
definitions of ``liquidation loss,'' ``increased loss,'' and ``excess 
loss'' how the Board would calculate that amount. The proposed rule, by 
contrast, would delete these three definitions and simply provide that 
the Board will assess the Federal Reserve Banks for any amount the 
Board pays to the FDIC in accordance with section 10B(b) of the Federal 
Reserve Act.

Regulatory Flexibility Act

    In accordance with section 3(a) of the Regulatory Flexibility Act 
(5 U.S.C. 603(a)) the Board must publish an initial regulatory 
flexibility analysis with this proposed regulation. As discussed above, 
the proposed above-market discount rate structure is designed to enable 
the discount window to operate more efficiently as a back-up source of 
funds for individual depository institutions and as a mechanism for 
implementing the policy objectives of the Federal Reserve System. By 
limiting primary credit eligibility to generally sound institutions, 
minimizing a Reserve Bank's need to question potential borrowers, and 
making the borrowing programs more transparent, the proposal seeks to 
eliminate current disincentives for depository institutions to seek 
Federal Reserve credit when money markets tighten. The Board knows of 
no other regulations that overlap or conflict with, or duplicate, the 
proposed rule.
    The proposed rule would apply to all depository institutions that 
are eligible to borrow at the discount window, including approximately 
16,000 small depository institutions, and would not add any 
recordkeeping, reporting, or compliance requirements associated with 
discount window borrowing. The requirements of the proposed rule would 
be the same for all depository institutions regardless of their size.

[[Page 36549]]

However, if the Board altered the seasonal credit program in response 
to public comments, small depository institutions, which are the 
primary users of that program, would be affected more than larger 
institutions. Because the Board estimates that fewer than 5 percent of 
eligible small depository institutions typically receive seasonal 
credit each year, the Board does not expect changes to or elimination 
of the seasonal credit program to have a large impact in the aggregate.
    The Board solicits comment on the likely impact the proposed rule 
would have on depository institutions, including those that are small 
business concerns. The Board particularly is interested in the public's 
view on how the increase in the discount rate relative to money market 
interest rates and the corresponding reduction in administrative burden 
would affect depository institutions of different sizes.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR 1320 Appendix A.1), the Board has reviewed the proposed 
rule under the authority delegated to the Board by the Office of 
Management and Budget. The proposed rule contains no new collections of 
information and proposes no substantive changes to existing collections 
of information pursuant to the Paperwork Reduction Act.

List of Subjects in 12 CFR Part 201

    Credits.
    For the reasons set forth in the preamble, the Board revises part 
201 of subchapter A of Chapter II, Title 12 of the Code of Federal 
Regulations to read as follows:

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

Sec.
201.1 Authority, purpose and scope.
201.2 Definitions.
201.3 Extensions of credit generally.
201.4 Availability and terms of credit.
201.5 Limitations on availability and assessments.
201.51 Interest rates applicable to credit extended by a Federal 
Reserve Bank.

    Authority: 12 U.S.C. 248(i)-(j), 347a, 347b, 343 et seq., 347c, 
348 et seq., 357, 374, 374a, and 461.


[sect] 201.1  Authority, purpose and scope.

    (a) Authority. This part is issued under the authority of sections 
10A, 10B, 11(i), 11(j), 13, 13A, 14(d), and 19 of the Federal Reserve 
Act (12 U.S.C. 248(i)-(j), 347a, 347b, 343 et seq., 347c, 348 et seq., 
357, 374, 374a, and 461).
    (b) Purpose and scope. This part establishes rules under which a 
Federal Reserve Bank may extend credit to depository institutions and 
others. Except as otherwise provided, this part applies to United 
States branches and agencies of foreign banks that are subject to 
reserve requirements under Regulation D (12 CFR part 204) in the same 
manner and to the same extent as this part applies to depository 
institutions. The Federal Reserve System extends credit with due regard 
to the basic objectives of monetary policy and the maintenance of a 
sound and orderly financial system.


[sect] 201.2  Definitions.

    For purposes of this part, the following definitions shall apply:
    (a) Appropriate federal banking agency has the same meaning as in 
section 3 of the Federal Deposit Insurance Act (FDI Act) (12 U.S.C. 
1813(q)).
    (b) Critically undercapitalized insured depository institution 
means any insured depository institution as defined in section 3 of the 
FDI Act (12 U.S.C. 1813(c)(2)) that is deemed to be critically 
undercapitalized under section 38 of the FDI Act (12 U.S.C. 
1831o(b)(1)(E)) and its implementing regulations.
    (c)(1) Depository institution means an institution that maintains 
reservable transaction accounts or nonpersonal time deposits and is:
    (i) An insured bank as defined in section 3 of the FDI Act (12 
U.S.C. 1813(h)) or a bank that is eligible to make application to 
become an insured bank under section 5 of such act (12 U.S.C. 1815);
    (ii) A mutual savings bank as defined in section 3 of the FDI Act 
(12 U.S.C. 1813(f)) or a bank that is eligible to make application to 
become an insured bank under section 5 of such act (12 U.S.C. 1815);
    (iii) A savings bank as defined in section 3 of the FDI Act (12 
U.S.C. 1813(g)) or a bank that is eligible to make application to 
become an insured bank under section 5 of such act (12 U.S.C. 1815);
    (iv) An insured credit union as defined in section 101 of the 
Federal Credit Union Act (12 U.S.C. 1752(7)) or a credit union that is 
eligible to make application to become an insured credit union pursuant 
to section 201 of such act (12 U.S.C. 1781);
    (v) A member as defined in section 2 of the Federal Home Loan Bank 
Act (12 U.S.C. 1422(4)); or
    (vi) A savings association as defined in section 3 of the FDI Act 
(12 U.S.C. 1813(b)) that is an insured depository institution as 
defined in section 3 of the act (12 U.S.C. 1813(c)(2)) or is eligible 
to apply to become an insured depository institution under section 5 of 
the act (12 U.S.C. 15(a)).
    (2) The term ``depository institution'' does not include a 
financial institution that is not required to maintain reserves under 
[sect] 204.1(c)(4) of Regulation D (12 CFR 204.1(c)(4)) because it is 
organized solely to do business with other financial institutions, is 
owned primarily by the financial institutions with which it does 
business, and does not do business with the general public.
    (d) Transaction account and nonpersonal time deposit have the 
meanings specified in Regulation D (12 CFR part 204).
    (e) Undercapitalized insured depository institution means any 
insured depository institution as defined in section 3 of the FDI Act 
(12 U.S.C. 1813(c)(2)) that:
    (1) Is not a critically undercapitalized insured depository 
institution; and
    (2)(i) Is deemed to be undercapitalized under section 38 of the FDI 
Act (12 U.S.C. 1831o(b)(1)(C)) and its implementing regulations; or
    (ii) Has received from its appropriate federal banking agency a 
composite CAMELS rating of 5 under the Uniform Financial Institutions 
Rating System (or an equivalent rating by its appropriate federal 
banking agency under a comparable rating system) as of the most recent 
examination of such institution.
    (f) Viable, with respect to a depository institution, means that 
the Board of Governors or the appropriate federal banking agency has 
determined, giving due regard to the economic conditions and 
circumstances in the market in which the institution operates, that the 
institution is not critically undercapitalized, is not expected to 
become critically undercapitalized, and is not expected to be placed in 
conservatorship or receivership. Although there are a number of 
criteria that may be used to determine viability, the Board of 
Governors believes that ordinarily an undercapitalized insured 
depository institution is viable if the appropriate federal banking 
agency has accepted a capital restoration plan for the depository 
institution under 12 U.S.C. 1831o(e)(2) and the depository institution 
is complying with that plan.


[sect] 201.3  Extensions of credit generally.

    (a) Advances to and discounts for a depository institution. (1) A 
Federal Reserve Bank may lend to a depository institution either by 
making an advance secured by acceptable collateral under [sect] 201.4 
of this part or by discounting certain types of paper. A Federal

[[Page 36550]]

Reserve Bank generally extends credit by making an advance.
    (2) An advance to a depository institution must be secured to the 
satisfaction of the Federal Reserve Bank that makes the advance. 
Satisfactory collateral generally includes United States government and 
federal-agency securities, and, if of acceptable quality, mortgage 
notes covering one-to four-family residences, state and local 
government securities, and business, consumer, and other customer 
notes.
    (3) If a Federal Reserve Bank concludes that a discount would meet 
the needs of a depository institution or an institution described in 
section 13A of the Federal Reserve Act (12 U.S.C. 349) more 
effectively, the Reserve Bank may discount any paper indorsed by the 
institution, provided the paper meets the requirements specified in the 
Federal Reserve Act.
    (b) No obligation to make advances or discounts. A Federal Reserve 
Bank shall have no obligation to make, increase, renew, or extend any 
advance or discount to any depository institution.
    (c) Information requirements. (1) Before extending credit to a 
depository institution, a Federal Reserve Bank should determine if the 
institution is an undercapitalized insured depository institution or a 
critically undercapitalized insured depository institution and, if so, 
follow the lending procedures specified in [sect] 201.5.
    (2) Each Federal Reserve Bank shall require any information it 
believes appropriate or desirable to ensure that assets tendered as 
collateral for advances or for discount are acceptable and that the 
borrower uses the credit provided in a manner consistent with this 
part.
    (3) Each Federal Reserve Bank shall:
    (i) Keep itself informed of the general character and amount of the 
loans and investments of a depository institution as provided in 
section 4(8) of the Federal Reserve Act (12 U.S.C. 301); and
    (ii) Consider such information in determining whether to extend 
credit.
    (d) Indirect credit for others. Except for depository institutions 
that receive primary credit as described in [sect] 201.4(a), 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.


[sect] 201.4  Availability and terms of credit.

    (a) Primary credit. A Federal Reserve Bank may extend primary 
credit on a very short-term basis, usually overnight, to a depository 
institution that is in generally sound condition in the judgment of the 
Reserve Bank. Such primary credit ordinarily is extended with minimal 
administrative burden on the borrowing institution. A Federal Reserve 
Bank also may extend primary credit with maturities up to a few weeks 
to a depository institution if the Reserve Bank determines that the 
institution is in generally sound condition and that the institution 
cannot obtain such credit in the market on reasonable terms. Credit 
extended under the primary credit program is granted at the primary 
discount rate.
    (b) Secondary credit. A Federal Reserve Bank may extend secondary 
credit to meet temporary funding needs of a depository institution that 
is not eligible for primary credit if, in the judgment of the Reserve 
Bank, such a credit extension would be consistent with the 
institution's timely return to a reliance on market funding sources. A 
Reserve Bank also may extend secondary credit if the Reserve Bank 
determines that such credit would facilitate the orderly resolution of 
serious financial difficulties of a depository institution. Credit 
extended under the secondary credit program is granted at a rate above 
the primary discount rate.
    (c) Seasonal credit. A Federal Reserve Bank may extend seasonal 
credit for periods longer than those permitted under primary credit to 
assist a smaller depository institution in meeting regular needs for 
funds arising from expected patterns of movement in its deposits and 
loans. An interest rate that varies with the level of short-term market 
interest rates is applied to seasonal credit.
    (1) A Federal Reserve Bank may extend seasonal credit only if:
    (i) The depository institution's seasonal needs exceed a threshold 
that the institution is expected to meet from other sources of 
liquidity (this threshold is calculated as a certain percentage, 
established by the Board of Governors, of the institution's average 
total deposits in the preceding calendar year); and
    (ii) The Federal Reserve Bank is satisfied that the institution's 
qualifying need for funds is seasonal and will persist for at least 
four weeks.
    (2) The Board may establish special terms for seasonal credit when 
depository institutions are experiencing unusual seasonal demands for 
credit in a period of liquidity strain.
    (d) Emergency credit for others. In unusual and exigent 
circumstances and after consultation with the Board of Governors, a 
Federal Reserve Bank may extend credit to an individual, partnership, 
or corporation that is not a depository institution if, in the judgment 
of the Federal Reserve Bank, credit is not available from other sources 
and failure to obtain such credit would adversely affect the economy. 
If the collateral used to secure emergency credit consists of assets 
other than obligations of, or fully guaranteed as to principal and 
interest by, the United States or an agency thereof, credit must be in 
the form of a discount and five or more members of the Board of 
Governors must affirmatively vote to authorize the discount prior to 
the extension of credit. Emergency credit will be extended at a rate 
above the highest rate in effect for advances to depository 
institutions.


[sect] 201.5  Limitations on availability and assessments.

    (a) Lending to undercapitalized insured depository institutions. A 
Federal Reserve Bank may make or have outstanding advances to or 
discounts for a depository institution that it knows to be an 
undercapitalized insured depository institution, only:
    (1) If, in any 120-day period, advances or discounts from any 
Federal Reserve Bank to that depository institution are not outstanding 
for more than 60 days during which the institution is an 
undercapitalized insured depository institution; or
    (2) During the 60 calendar days after the receipt of a written 
certification from the chairman of the Board of Governors or the head 
of the appropriate federal banking agency that the borrowing depository 
institution is viable; or
    (3) After consultation with the Board of Governors. In unusual 
circumstances, when prior consultation with the Board is not possible, 
a Federal Reserve Bank should consult with the Board as soon as 
possible after extending credit that requires consultation under this 
paragraph (a).
    (b) Lending to critically undercapitalized insured depository 
institutions. A Federal Reserve Bank may make or have outstanding 
advances to or discounts for a depository institution that it knows to 
be a critically undercapitalized insured depository institution only:
    (1) During the 5-day period beginning on the date the institution 
became a critically undercapitalized insured depository institution; or
    (2) After consultation with the Board of Governors. In unusual 
circumstances, when prior consultation with the Board is not possible, 
a Federal Reserve Bank should consult with the Board as soon as 
possible after extending credit that requires consultation under this 
paragraph (b).

[[Page 36551]]

    (c) Assessments. The Board of Governors will assess the Federal 
Reserve Banks for any amount that the Board pays to the FDIC due to any 
excess loss in accordance with section 10B(b) of the Federal Reserve 
Act (12 U.S.C. 347b(b)). Each Federal Reserve Bank shall be assessed 
that portion of the amount that the Board of Governors pays to the FDIC 
that is attributable to an extension of credit by that Federal Reserve 
Bank, up to 1 percent of its capital as reported at the beginning of 
the calendar year in which the assessment is made. The Board of 
Governors will assess all of the Federal Reserve Banks for the 
remainder of the amount it pays to the FDIC in the ratio that the 
capital of each Federal Reserve Bank bears to the total capital of all 
Federal Reserve Banks at the beginning of the calendar year in which 
the assessment is made, provided, however, that if any assessment 
exceeds 50 percent of the total capital and surplus of all Federal 
Reserve Banks, whether to distribute the excess over such 50 percent 
shall be made at the discretion of the Board of Governors.


[sect] 201.51  Interest rates applicable to credit extended by a 
Federal Reserve Bank.

    (a) Primary credit. The rates for primary credit provided to 
depository institutions under [sect] 201.4(a) are: [The chart will 
appear in the final rule.]
    (b) Secondary credit. An interest rate 50 basis points above the 
rate for primary credit in [sect] 201.51 will apply to secondary credit 
extended to depository institutions under [sect] 201.4(c).
    (c) Seasonal credit. The rate for seasonal credit extended to 
depository institutions under [sect] 201.4(b) is a flexible rate that 
takes into account rates on market sources of funds.

    By order of the Board of Governors of the Federal Reserve 
System, May 16, 2002.

Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 02-12781 Filed 5-23-02; 8:45 am]
BILLING CODE 6210-01-P