FRB: Annual Report 2007, Record of Policy Actions of the Board of Governors

Regulation A: Extensions of Credit by Federal Reserve Banks

[Docket No. R-1304]

On December 10, 2007, the Board approved amendments establishing a temporary term auction facility (TAF), with the intention of permitting depository institutions to obtain credit from the Federal Reserve on a secured basis at rates that meet the market demand for credit of relatively short terms. The TAF allows depository institutions to obtain advances from their local Federal Reserve Banks at interest rates determined through auctions. The amendments are effective December 12, 2007.

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Regulation B: Equal Credit Opportunity

[Docket Nos. R-1281]

Regulation E: Electronic Fund Transfers

[Docket Nos. R-1282]

Regulation M: Consumer Leasing

[Docket Nos. R-1283]

Regulation Z: Truth in Lending

[Docket Nos. R-1284]

Regulation DD: Truth in Savings

[Docket Nos. R-1285]

On October 23, 2007, the Board approved amendments to the requirements in several regulations and official staff commentaries for electronic disclosures to consumers concerning consumer financial services and fair lending. The amendments simplify and clarify the requirements by withdrawing unnecessary or unduly burdensome provisions in the interim final rules approved in March 2001 and by providing guidance on using electronic disclosures. The amendments are effective December 10, 2007, and compliance is mandatory by October 1, 2008.

On December 11, 2007, technical amendments were approved, under delegated authority, to clarify certain amendments to the official staff commentaries to Regulations B and Z that were approved by the Board on October 23. The technical amendments are effective January 14, 2008, and compliance is mandatory by October 1, 2008.

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Regulation D: Reserve Requirements of Depository Institutions

[Docket No. R-1262]

On April 2, 2007, the Board approved revisions to its 1980 interpretation of the regulation, which sets forth criteria for the exemption of bankers' banks from reserve requirements. The revisions allow the Board to make case-by-case determinations as to whether a bankers' bank may, to a limited extent, have as customers certain entities that are not specified in the interpretation without losing its exemption. The revised interpretation is effective May 7, 2007.

[Docket No. R-1297]

On September 24, 2007, the Board approved amendments to reflect the annual indexing of the reserve requirement exemption amount and the low reserve tranche. For 2008, the reserve requirement exemption amount is $9.3 million, an increase from $8.5 million in 2007, and the low reserve tranche is $43.9 million, a decrease from $45.8 million in 2007. The Board also adjusted the nonexempt deposit cutoff level ($216.2 million for 2008) and the reduced reporting limit ($1.211 billion for 2008), which are used to determine the frequency of reporting by depository institutions.

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Regulation E: Electronic Fund Transfers

[Docket No. R-1270]

On June 25, 2007, the Board approved amendments to the regulation and official staff commentary to exempt electronic fund transfers of $15 or less from the requirement to make paper receipts available to consumers for transactions initiated at electronic terminals. The amendments are effective August 6, 2007.

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Regulation H: Membership of State Banking Institutions in the Federal Reserve System

Regulation K :International Banking Operations

[Docket No. R-1279]

On September 14, 2007, the Board, acting with the other federal bank and thrift regulatory agencies, approved final rules to extend, from twelve to eighteen months, the on-site examination cycle for certain state member banks and U.S. offices of foreign banks. The extended schedule applies to (1) insured institutions that have up to $500 million in total assets, are well capitalized and well managed, and receive a composite CAMELS rating of 1 or 2 and (2) U.S. branches and agencies of foreign banks that have up to $500 million in total assets and meet comparable criteria. The final rules, which implement the Financial Services Regulatory Relief Act of 2006 and related legislation, are identical to interim final rules approved by the Board on March 16, 2007, and are effective September 25, 2007.

Votes for this action: Chairman Bernanke, Vice Chairman Kohn, and Governors Warsh, Kroszner, and Mishkin.

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Regulation H: Membership of State Banking Institutions in the Federal Reserve System

Regulation Y: Bank Holding Companies and Change in Bank Control

[Docket No. R-1261]

On November 2, 2007, the Board, acting with the other federal bank and thrift regulatory agencies, approved a new risk-based capital adequacy framework for banking organizations (which include thrifts), popularly known as Basel II. The new framework requires some banking organizations, and permits other qualifying banking organizations, to calculate their regulatory capital requirements using an internal ratings-based approach for credit risk and advanced measurement approaches for operational risks. Basel II, which modernizes the Basel Capital Accord of 1988, consists of three components, or pillars: minimum regulatory capital requirements (pillar 1), supervisory review of capital adequacy (pillar 2), and market discipline through enhanced disclosure (pillar 3). The final rules set forth the qualifying criteria and applicable risk-based capital requirements for banking organizations operating under the new framework. They are effective April 1, 2008.

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Regulation L: Management Official Interlocks

[Docket No. R-1272]

On July 9, 2007, the Board, acting with the other federal bank and thrift regulatory agencies, approved a final rule to permit management interlocks between unaffiliated depository institutions that have offices in the same relevant metropolitan statistical area if one of the institutions has less than $50 million (previously $20 million) in total assets. The final rule, which implements provisions of the Financial Services Regulatory Relief Act of 2006, is identical to an interim final rule approved in December 2006 and is effective July 16, 2007.

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Regulation O: Loans to Executive Officers, Directors, and Principal Shareholders of Member Banks

[Docket No. R-1271]

On May 23, 2007, the Board approved a final rule to eliminate certain reporting requirements that have not contributed significantly to effective monitoring or to prevention of insider lending abuse. The final rule, which implements provisions of the Financial Services Regulatory Relief Act of 2006, is identical to an interim final rule approved in December 2006 and is effective July 2, 2007.

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Regulation R: Exceptions for Banks from the Definition of Broker in the Securities Exchange Act of 1934

[Docket No. R-1274]

On September 24, 2007, the Board, acting with the Securities and Exchange Commission (SEC), approved a single set of joint final rules to implement certain exceptions for banks from the definition of broker under section 3(a)(4) of the Securities Exchange Act of 1934 (Exchange Act), as amended by the so-called push-out provisions of the Gramm-Leach-Bliley Act of 1999. The final rules help define the scope of securities activities that banks may conduct in providing banking services to their customers without registering with the SEC as a securities broker or complying with the SEC's rules. Some portions of the final rules are effective September 28, 2007; the remaining portions are effective December 3, 2007. However, banks are exempt from complying with the final rules and the broker exceptions in section 3(a)(4)(B) of the Exchange Act until the first day of their first fiscal year that begins after September 30, 2008.

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Regulation V: Fair Credit Reporting

[Docket No. R-1203]

On October 17, 2007, the Board, acting with the other federal financial institutions regulatory agencies, approved final rules requiring that a financial institution provide notice and a reasonable opportunity to opt out before using information from an affiliate to market its own products and services to a consumer. The final rules, which implement the affiliate-marketing provisions of the Fair and Accurate Credit Transactions Act of 2003, are effective January 1, 2008, and compliance is mandatory by October 1, 2008.

[Docket No. R-1255]

On October 23, 2007, the Board, acting with the other federal financial institutions regulatory agencies and the Federal Trade Commission, approved final rules requiring financial institutions and creditors that open or hold certain accounts to develop and implement a written identity theft prevention program that includes reasonable policies and procedures for detecting, preventing, and mitigating identity theft. The final rules provide guidelines for developing and implementing those programs and examples of "red flags" signaling possible identity theft. In addition, the final rules require (1) debit and credit card issuers to assess the validity of change-of-address notifications under certain circumstances and (2) users of consumer reports to establish and maintain reasonable policies and procedures regarding notifications of address discrepancies they receive from consumer reporting agencies. The final rules and guidelines, which implement provisions of the Fair and Accurate Credit Transactions Act of 2003, are effective January 1, 2008, and compliance is mandatory by November t1, 2008.

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Policy Statements and Other Actions: Policy on Payments System Risk

[Docket No. OP-1259]

On January 11, 2007, the Board approved revisions to part 1 of its Policy on Payments System Risk to address risk management in payments and settlement systems. The revisions establish an expectation that payments and settlement systems under the Board's authority that are systemically important will publicly disclose self-assessments of their compliance with the relevant principles or minimum standards set forth in the policy. Self-assessments should be updated after any material change and should be reviewed at least every two years. In addition, the revisions incorporate the Recommendations for Central Counterparties, which were developed jointly by international committees of central banks and securities commissions, as the Board's minimum standards for central counterparties. The revisions also clarify the purpose of and revise the scope of part 1 relating to central counterparties. The revisions are effective January 19, 2007, and the initial self-assessments are expected to be completed and published by December 31, 2007.

Illustrations of Consumer Information for Nontraditional Mortgage Products

[Docket No. OP-1267]

On May 25, 2007, the Board, acting with the other federal financial institutions regulatory agencies, approved final illustrations of consumer information for nontraditional mortgage products to assist financial institutions in implementing the consumer protection provisions of the Interagency Guidance on Nontraditional Mortgage Product Risks issued in October 2006. Financial institutions may use the illustrations as provided, change their format, or tailor the information to specific transactions or products. The illustrations are effective June 8, 2007.

Statement on Subprime Mortgage Lending

[Docket No. OP-1278]

On June 27, 2007, the Board, acting with the other federal financial institutions regulatory agencies, approved interagency guidance intended to clarify how financial institutions may offer certain adjustable-rate mortgages in a manner that is safe and sound and also allows for clear disclosure of the risks assumed by the borrower. The guidance is effective July 10, 2007.

Statement on Loss Mitigation Strategies for Servicers of Residential Mortgages

On August 29, 2007, the Board, acting with the other federal financial institutions regulatory agencies and the Conference of State Bank Supervisors, approved guidance to encourage federally regulated and state-regulated financial institutions and state-supervised servicers of residential mortgages to pursue strategies to mitigate losses while preserving home ownership to the extent possible and appropriate.

Permissible Complementary Activities for Financial Holding Companies

On September 6, 2007, the Board determined under the Gramm-Leach-Bliley Act of 1999 that, subject to certain limitations, disease management and mail-order pharmacy services are complementary activities permissible for financial holding companies. To qualify, an activity must complement a financial activity and not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. The Board concluded that disease management and mail-order pharmacy services complement the financial activity of underwriting and selling health insurance and do not pose a substantial risk. The determination is effective September 7, 2007.

On December 3, 2007, the Board similarly determined that, subject to certain limitations, energy management activities are permissible activities for financial holding companies because they complement the financial activities of engaging as principal in commodity derivatives activities and providing advisory services for derivatives transactions and do not pose a substantial risk. The determination is effective December 4, 2007.

Permissible Financial Activities for Financial Holding Companies

On October 10, 2007, the Board determined under the Gramm-Leach-Bliley Act of 1999 and after consultation with the Secretary of the Treasury that, subject to certain limitations, the acquisition, management, and operation in the United Kingdom of certain third-party defined benefit pension plans are financial activities permissible for financial holding companies. The determination is effective October 12, 2007.

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Discount Rates in 2007

Under the Federal Reserve Act, the boards of directors of the Federal Reserve Banks must establish rates on discount window loans to depository institutions at least every fourteen days, subject to review and determination by the Board of Governors.

Primary Credit

Primary credit, the Federal Reserve's main lending program, is extended at a rate above the federal funds rate target set by the Federal Open Market Committee (FOMC). It is typically made available with minimal administration for very short terms as a backup source of liquidity to depository institutions that, in the judgment of the lending Federal Reserve Bank, are in generally sound financial condition.

During 2007, acting on recommendations of the Reserve Bank boards of directors, the Board approved four reductions in the primary credit rate, bringing the rate from 6-1/4 percent to 4-3/4 percent. The first of these reductions came on August 17 in response to the emergence of severe financial market strains in previous weeks. The Board approved a temporary narrowing of the spread of the primary credit rate over the FOMC's target rate to 50 basis points, from 100 basis points, and announced a temporary change to the Reserve Banks' discount window lending practices to allow the provision of term financing for as long as thirty days, renewable by the borrower. These changes remained in effect at the end of 2007. In the remaining three instances, the Board reached its determinations on the primary credit rate in conjunction with the FOMC's decisions to lower the target federal funds rate by a cumulative 1 percentage point, from 5-1/4 percent to 4-1/4 percent. Monetary policy developments are reviewed more fully in other parts of this report (see the section "Monetary Policy and Economic Developments" and the minutes of FOMC meetings held in 2007).

Secondary and Seasonal Credit

Secondary credit is available in appropriate circumstances to depository institutions that do not qualify for primary credit. The secondary credit rate is set at a spread above the primary credit rate. Throughout 2007, the spread was set at 50 basis points.

Seasonal credit is available to smaller depository institutions to meet liquidity needs that arise from regular swings in their loans and deposits. The rate on seasonal credit is calculated every two weeks as an average of selected money-market yields, typically resulting in a rate close to the federal funds rate target.

At year-end, the secondary and seasonal credit rates were 5-1/4 percent and 4.70 percent, respectively.

Term Auction Facility Credit

In December, the Federal Reserve established a temporary Term Auction Facility (TAF). Under the TAF, the Federal Reserve auctions term funds to depository institutions that are in generally sound financial condition and are eligible to borrow under the primary credit program. The amount of each auction is determined in advance by the Federal Reserve, and the interest rate on TAF credit is determined by the bidding process as the rate at which all bids can be fulfilled, up to the maximum auction amount and subject to a minimum bid rate. The Federal Reserve conducted two TAF auctions in 2007--on December 17 and December 20; the resulting rates were 4.65 percent and 4.67 percent, respectively.

Votes on Discount Rate Changes

About every two weeks during 2007, the Board approved proposals by the twelve Reserve Banks to maintain the formulas for computing the secondary and seasonal credit rates. In December, the Board approved proposals by the twelve Reserve Banks to establish the auction method by which the TAF credit rate is set. Details on the four actions by the Board to approve changes in the primary credit rate are provided below.

August 16, 2007. The Board approved actions taken by the directors of the Federal Reserve Banks of New York and San Francisco to lower the rate on discounts and advances under the primary credit program by 1/2 percentage point, to 5-3/4 percent, effective August 17, 2007. The Board also approved an identical action subsequently taken by the directors of the Federal Reserve Banks of Boston, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Minneapolis, Kansas City, and Dallas, effective August 17, 2007, and the Federal Reserve Bank of St. Louis, effective August 20, 2007.

September 18, 2007. Effective this date, the Board approved actions taken by the directors of the Federal Reserve Banks of Boston, New York, Cleveland, Minneapolis, Kansas City, and San Francisco to lower the rate on discounts and advances under the primary credit program by 1/2 percentage point, to 5-1/4 percent. The same change was approved for the Federal Reserve Bank of St. Louis, effective September 19, 2007. The Board also approved an identical action subsequently taken by the directors of the Federal Reserve Banks of Richmond, Atlanta, and Dallas, effective September 19, 2007, and the Federal Reserve Banks of Philadelphia and Chicago, effective September 20, 2007.

October 31, 2007. Effective this date, the Board approved actions taken by the directors of the Federal Reserve Banks of New York, Richmond, Atlanta, Chicago, and San Francisco to lower the rate on discounts and advances under the primary credit program by 1/4 percentage point, to 5 percent. The same change was approved for the Federal Reserve Bank of St. Louis, effective November 1, 2007. The Board also approved an identical action subsequently taken by the directors of the Federal Reserve Banks of Boston, Philadelphia, Cleveland, Minneapolis, Kansas City, and Dallas effective November 1, 2007.

December 11, 2007. Effective this date, the Board approved actions taken by the directors of the Federal Reserve Banks of New York, Philadelphia, Cleveland, Richmond, Atlanta, and Chicago to lower the rate on discounts and advances under the primary credit program by 1/4 percentage point, to 4-3/4 percent. The same change was approved for the Federal Reserve Bank of St. Louis, effective December 12, 2007. The Board also approved identical actions subsequently taken by the directors of the Federal Reserve Banks of San Francisco, effective December 11, 2007; Boston, Minneapolis, and Dallas, effective December 12, 2007; and Kansas City, effective December 13, 2007.

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Note: Full texts of the policy actions are available via the online version of the Annual Report, from the "Reading Rooms" on the Board's FOIA web page, and on request from the Board's Freedom of Information Office.