Monthly Report on Credit and Liquidity Programs
and the Balance Sheet

Lending Facilities to Support Overall Market Liquidity

Lending to Depository Institutions

Recent Developments

• Credit provided to depository institutions through the discount window and the Term Auction Facility (TAF) has continued to decline, primarily reflecting reductions in loans outstanding under the TAF. The final TAF auction was conducted on March 8, 2010; credit extended under that auction matured on April 8, 2010.
• As indicated in table 5, the lendable value of total collateral pledged by depository institutions with discount window loans outstanding on March 31, 2010, was $29 billion, more than twice the amount of credit outstanding.

Background

The discount window helps to relieve liquidity strains for individual depository institutions and for the banking system as a whole by providing a source of funding in times of need. Much of the statutory framework that governs lending to depository institutions is contained in Section 10B of the Federal Reserve Act, as amended. The general policies that govern discount window lending are set forth in the Federal Reserve Board's Regulation A.

Depository institutions have, since 2003, had access to three types of discount window credit--primary credit, secondary credit, and seasonal credit. Primary credit is available to depository institutions in generally sound financial condition with few administrative requirements. Secondary credit may be provided to depository institutions that do not qualify for primary credit, subject to review by the lending Reserve Bank. Seasonal credit provides short-term funds to smaller depository institutions that experience regular seasonal swings in loans and deposits.

Table 3. Discount Window Credit Outstanding to Depository Institutions
Daily average borrowing for each class of borrower over four weeks ending March 31, 2010

Table 4. Concentration of Discount Window Credit Outstanding to Depository Institutions
For four weeks ending March 31, 2010

On August 17, 2007, in order to promote orderly market functioning, the Federal Reserve narrowed the spread between the primary credit rate (generally referred to as the discount rate) and the Federal Open Market Committee's (FOMC's) target federal funds rate to 50 basis points and began to allow the provision of primary credit for terms as long as 30 days. On March 16, 2008, the Federal Reserve further narrowed the spread between the primary credit rate and the target federal funds rate to 25 basis points, and increased the maximum maturity of primary credit loans to 90 days.

On November 17, 2009, in response to improved financial conditions, the Federal Reserve announced that the maximum maturity on primary credit loans would be reduced to 28 days effective January 14, 2010. On February 18, 2010, the Federal Reserve increased the spread between the primary credit rate and the top of the target range for the federal funds rate to 50 basis points, effective February 19, 2010. The Federal Reserve also announced that, effective March 18, 2010, the typical maximum maturity of primary credit loans would be shortened to overnight. These changes represented further normalization of the Federal Reserve's lending facilities and did not signal any change in the outlook for the economy or for monetary policy.

The TAF, which provides credit through an auction mechanism to depository institutions in generally sound financial condition, was introduced by the Federal Reserve in December 2007. All regular discount window loans and TAF loans must be fully collateralized to the satisfaction of the lending Reserve Bank, with an appropriate "haircut" applied to the value of the collateral.

On September 24, 2009, the Federal Reserve announced that the TAF would be scaled back in response to continued improvements in financial market conditions. The auction amount for the 84-day auctions was reduced in late 2009 and the maturity dates of the 84-day auctions were adjusted over time to align with the maturity dates of the 28-day auctions. Subsequently, the auction amount for the remaining 28-day auctions was tapered, and the final TAF auction was held on March 8, 2010.

In extending credit to depository institutions, the Federal Reserve closely monitors the financial condition of borrowers. Monitoring the financial condition of depository institutions is a four-step process designed to minimize the risk of loss to the Federal Reserve posed by weak or failing depository institutions. The first step is monitoring, on an ongoing basis, the safety and soundness of all depository institutions that access or may access the discount window and the payment services provided by the Federal Reserve. The second step is identifying institutions whose condition, characteristics, or affiliation would present higher-than-acceptable risk to the Federal Reserve in the absence of controls on their access to Federal Reserve lending facilities and other Federal Reserve services. The third step is communicating--to staff within the Federal Reserve System and to other supervisory agencies, if and when necessary--relevant information about those institutions identified as posing higher risk. The fourth step is implementing appropriate measures to mitigate the risks posed by such entities.

Table 5. Lendable Value of Collateral Pledged by Borrowing Depository Institutions
Billions of dollars, as of March 31, 2010

Table 6. Lendable Value of Securities Pledged by Depository Institutions by Rating
Billions of dollars, as of March 31, 2010

At the heart of the condition monitoring process is an internal rating system that provides a framework for identifying institutions that may pose undue risks to the Federal Reserve. The rating system relies mostly on information from each institution's primary supervisor, including CAMELS ratings, to identify potentially problematic institutions and classify them according to the severity of the risk they pose to the Federal Reserve.¹ Having identified institutions that pose a higher risk, the Federal Reserve then puts in place a standard set of risk controls that become increasingly stringent as the risk posed by an institution grows; individual Reserve Banks may implement additional risk controls to further mitigate risk if they deem it necessary.

Collateral

All extensions of discount window credit by the Federal Reserve must be secured to the satisfaction of the lending Reserve Bank by "acceptable collateral." Assets accepted as collateral are assigned a lendable value deemed appropriate by the Reserve Bank; lendable value is determined as the market price of the asset, less a haircut. When a market price is not available, a haircut may be applied to the outstanding balance or a valuation based on an asset's cash flow. Haircuts reflect credit risk and, for traded assets, the historical volatility of the asset's price and the liquidity of the market in which the asset is traded; the Federal Reserve's haircuts are generally in line with typical market practice. The Federal Reserve applies larger haircuts, and thus assigns lower lendable values, to assets for which no market price is available relative to comparable assets for which a market price is available. A borrower may be required to pledge additional collateral if its financial condition weakens. Collateral is pledged under the terms and conditions specified in the Federal Reserve Banks' standard lending agreement, Operating Circular No. 10 (www.frbservices.org/files/regulations/pdf/operating_circular_10.pdf).

Discount window loans and extensions of credit through the TAF are made with recourse to the borrower beyond the pledged collateral. Nonetheless, collateral plays an important role in mitigating the credit risk associated with these extensions of credit. The Federal Reserve generally accepts as collateral for discount window loans and TAF credit any assets that meet regulatory standards for sound asset quality. This category of assets includes most performing loans and most investment-grade securities, although for some types of securities (including commercial mortgage-backed securities, collateralized debt obligations, collateralized loan obligations, and certain non-dollar-denominated foreign securities) only AAA-rated securities are accepted. An institution may not pledge as collateral any instruments that the institution or its affiliates have issued. Additional collateral is required for discount window and TAF loans with remaining maturity of more than 28 days--for these loans, borrowing only up to 75 percent of available collateral is permitted. To ensure that they can borrow from the Federal Reserve should the need arise, many depository institutions that do not have an outstanding discount window or TAF loan nevertheless routinely pledge collateral.

Changes to the lending margins on discount window collateral took effect on October 19, 2009. The Federal Reserve periodically reviews its collateral valuation practices, and the new collateral margins reflect the results of a broad-based review, which began before the financial crisis, of methodology and data sources. For more information on these changes to collateral margins, refer to the Discount Window and Payments System Risk public website (www.frbdiscountwindow.org).

As shown in table 7, depository institutions that borrow from the Federal Reserve generally maintain collateral in excess of their current borrowing levels.

Table 7. Discount Window Credit Outstanding to Depository Institutions--Percent of Collateral Used
As of March 31, 2010

Commercial Paper Funding Facility (CPFF)

Recent Developments

• The Federal Reserve closed the CPFF on February 1, 2010. CPFF LLC will retain its existing commercial paper holdings until the end of April 2010, when the remaining commercial paper will mature; the LLC's other assets will remain until the LLC is dissolved.

Background

The CPFF, which was authorized under Section 13(3) of the Federal Reserve Act, was designed to support liquidity in the commercial paper markets. The CPFF provided a liquidity backstop to U.S. issuers of commercial paper through a specially created limited liability company (LLC) called CPFF LLC. This LLC purchased three-month unsecured and asset-backed commercial paper directly from eligible issuers. The Federal Reserve Bank of New York (FRBNY) provides financing to the LLC, and the FRBNY’s loan to the LLC is secured by all of the assets of the LLC, including those purchased with the accumulated upfront fees paid by the issuers. Breakdowns of commercial paper held in CPFF LLC, by type and credit rating, are shown in tables 9 and 10, respectively.

Table 8. Concentration of CPFF Issuers
For the four weeks ending March 31, 2010

Table 9. CPFF Commercial Paper Holdings by Type
Billions of dollars, as of March 31, 2010

Table 10. CPFF Commercial Paper Holdings by Rating
Billions of dollars, as of March 31, 2010

The CPFF was announced on October 7, 2008, and purchases of commercial paper began on October 27, 2008. This program is administered by the FRBNY, and the assets and liabilities of the LLC are consolidated onto the balance sheet of the FRBNY. The net assets of the LLC are shown in tables 1, 10, and 11 of the weekly H.4.1 statistical release, and primary accounts of the LLC are presented in table 7 of the H.4.1 statistical release. The CPFF was closed on February 1, 2010. CPFF LLC will retain its existing commercial paper holdings until the end of April 2010, when the remaining commercial paper will mature, and the LLC's other assets will remain until the LLC is dissolved.

Term Asset-Backed Securities Loan Facility (TALF)

Recent Developments

• As previously announced, the Federal Reserve ceased extending loans against newly issued asset-backed securities (ABS) and legacy commercial mortgage-backed securities (CMBS) through the TALF as of March 31, 2010. Newly issued CMBS may be financed through June 30, 2010. The Federal Reserve Bank of New York (FRBNY) requested that issuers, originators, or sponsors intending to request TALF eligibility for a newly issued CMBS prior to the program's expiration submit preliminary deal term sheets for the FRBNY's review by April 19, 2010. No preliminary deal term sheets were received.
• The March 2010 non-CMBS TALF subscription supported the primary issuance of six ABS deals worth a total of about $7.2 billion, of which $3.2 billion was financed through the TALF. Approximately $0.9 billion in loans was also extended against previously issued TALF-eligible ABS collateral. In addition, $0.9 billion in TALF loans was extended against legacy CMBS collateral in the March CMBS TALF subscription and $1.1 billion in TALF loans was extended against legacy CMBS collateral in the February CMBS TALF subscription, which settled on February 25, 2010.
• As of March 31, 2010, several TALF-related items on the H.4.1 have been modified to include fair value adjustments. A fair value adjustment of $0.6 billion increased the reported value of the credit extended by the FRBNY to eligible borrowers through the TALF. The fair value adjustment reflects the value of the future interest to be received by the FRBNY that is paid to TALF LLC to provide credit protection. The adjustment is substantially offset by a corresponding increase in the fair value of the liability to the U.S. Treasury related to its beneficial interest in TALF LLC.

Table 11. TALF: Number of Borrowers and Loans Outstanding
As of March 31, 2010

Background

On November 25, 2008, the Federal Reserve announced the creation of the TALF under the authority of Section 13(3) of the Federal Reserve Act. The TALF is a funding facility under which the FRBNY extends credit with a term of up to five years to holders of eligible ABS. The TALF is intended to assist financial markets in accommodating the credit needs of consumers and businesses of all sizes by facilitating the issuance of ABS collateralized by a variety of consumer and business loans; it is also intended to improve market conditions for ABS more generally.

Eligible collateral initially included U.S. dollar-denominated ABS that (1) are backed by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA) and (2) have a credit rating in the highest investment-grade rating category from two or more eligible nationally recognized statistical rating organizations (NRSROs) and do not have a credit rating below the highest investment-grade rating category from an eligible NRSRO. The loans provided through the TALF are non-recourse, meaning that the obligation of the borrower can be discharged by surrendering the collateral to the FRBNY. Borrowers commit their own risk capital in the form of haircuts against the collateral, which serve as the borrower's equity in the transaction and act as a buffer to absorb any decline in the collateral's value in the event the loan is not repaid. Using funds authorized under the Troubled Assets Relief Program (TARP) of the Emergency Economic Stabilization Act of 2008, the U.S. Treasury has committed to lend up to $20 billion to TALF LLC to provide protection against losses to the FRBNY.

On February 10, 2009, the Federal Reserve Board announced that it would consider expanding the size of the TALF to as much as $1 trillion and potentially broaden the eligible collateral to encompass other types of newly issued AAA-rated ABS, such as ABS backed by commercial mortgages or private-label (non-agency) ABS backed by residential mortgages. Any expansion of the TALF would be supported by the Treasury's providing additional funds from the TARP. As of March 31, 2010, however, the authorized limit for the program remained at $200 billion.

Between March 2009 and May 2009, the Federal Reserve expanded the range of eligible collateral for TALF loans to include:

• ABS backed by loans or leases related to business equipment, leases of vehicle fleets, floorplan loans, mortgage servicing advances, and insurance premium finance loans; and
• newly issued CMBS and certain high-quality CMBS issued before January 1, 2009 (so-called "legacy" CMBS).

High-quality newly issued and legacy CMBS must have at least two AAA ratings from a list of eligible NRSROs--DBRS, Inc.; Fitch Ratings; Moody's Investors Service; Realpoint; or Standard & Poor's--and must not have a rating below AAA from any of these rating agencies.

The Federal Reserve also authorized TALF loans with maturities of five years, available for the June 2009 funding, to finance purchases of CMBS, ABS backed by student loans, and ABS backed by loans guaranteed by the SBA. The Federal Reserve indicated that up to $100 billion of TALF loans could have five-year maturities and that some of the interest on collateral financed with a five-year loan may be diverted toward an accelerated repayment of the loan, especially in the fourth and fifth years.

On September 1, 2009, the following four non-primary dealer broker-dealers were named as agents for the TALF: CastleOak Securities, LP; Loop Capital Markets, LLC; Wells Fargo Securities, LLC; and The Williams Capital Group, LP. These agents, like the primary dealers, may represent borrowers in accessing the facility.

On October 5, 2009, the Federal Reserve announced two changes to the procedures for evaluating ABS pledged to the TALF. The first change was to propose a rule that would establish criteria for the FRBNY to use when determining which NRSROs' ratings are accepted for establishing the eligibility of ABS to be pledged as collateral to the TALF. The proposed rule was intended to strike a balance between the goal of promoting competition among NRSROs and the goal of ensuring appropriate protection against credit risk in TALF for the U.S. taxpayer. The Board's rule regarding NRSROs does not apply to discount window lending or to other extensions of credit provided by the Federal Reserve System. The rule establishing the process for approving NRSROs was finalized on December 4, 2009. The second change was the implementation by the FRBNY of a formal risk assessment of all proposed collateral for TALF ABS transactions, in addition to continuing to require that collateral for TALF loans receive two AAA ratings from TALF-eligible NRSROs. This was intended to protect against TALF accepting excessive risk, as well as address any increased credit risk in the program caused by an expansion of the set of NRSROs accepted at TALF. The goal of the risk assessment process for ABS is to ensure that TALF collateral continues to comply with the existing high standards for credit quality, transparency, and simplicity of structure.

In accordance with the Board's rule, the FRBNY announced that the credit ratings of four NRSROs--DBRS, Inc.; Fitch Ratings; Moody's Investors Service; and Standard & Poor's--would be accepted for establishing the eligibility of selected types of non-mortgage-backed ABS as collateral for the TALF. These NRSROs' ratings were accepted beginning with the TALF's February 2010 non-mortgage-backed ABS subscription.

The Federal Reserve Board initially authorized the offering of new TALF loans through December 31, 2009, but subsequently authorized an extension of the program until March 31, 2010, for loans against newly issued ABS and legacy CMBS, and until June 30, 2010, for loans against newly issued CMBS.

Table 12A. Issuers of Non-CMBS that Collateralize Outstanding TALF Loans
As of March 31, 2010

Table 12B. Issuers of Newly Issued CMBS that Collateralize Outstanding TALF Loans
As of March 31, 2010

Table 12C. Issuers of Legacy CMBS that Collateralize Outstanding TALF Loans
As of March 31, 2010

Collateral and Risk Management

Under the TALF, the FRBNY lends on a non-recourse basis to holders of certain ABS backed by consumer, business, and commercial mortgage loans. Eligible collateral for the TALF includes U.S. dollar-denominated ABS that (1) have a credit rating in the highest long-term or, in the case of non-mortgage-backed ABS, the highest short-term investment-grade rating category (for example, AAA) from at least two eligible NRSROs and (2) do not have a credit rating below the highest investment-grade rating category from an eligible NRSRO. Eligible small-business-loan ABS also include U.S. dollar-denominated cash ABS for which all of the underlying credit exposures are fully guaranteed as to principal and interest by the full faith and credit of the U.S. government. All or substantially all of the credit exposures underlying eligible ABS must be exposures to U.S.-domiciled obligors or with respect to real property located in the United States or its territories. The underlying credit exposures of eligible ABS must be student loans, auto loans, credit card loans, loans or leases relating to business equipment, leases of vehicle fleets, floorplan loans, mortgage servicing advances, insurance premium finance loans, commercial mortgages, or loans guaranteed by the SBA. Except for ABS for which the underlying credit exposures are SBA-guaranteed loans, eligible newly issued ABS must be issued on or after January 1, 2009. Eligible legacy CMBS must be issued before January 1, 2009, must be senior in payment priority to all other interests in the underlying pool of commercial mortgages, and must meet certain other criteria designed to protect the Federal Reserve and the Treasury from credit risk. In almost all cases, eligible collateral for a particular borrower must not be backed by loans originated or securitized by the borrower or by an affiliate of the borrower.

The FRBNY's loan is secured by the ABS collateral, with the FRBNY lending an amount equal to the market value of the ABS, less a haircut. The lendable value of the ABS may be adjusted based on a risk assessment by the FRBNY. The Federal Reserve has set initial haircuts for each type of eligible collateral to reflect an assessment of the riskiness and maturity of the various types of eligible ABS. Breakdowns of TALF collateral by underlying loan type and credit rating are shown in tables 13 and 14, respectively.

Table 13. TALF Collateral by Underlying Loan Type
Billions of dollars, as of March 31, 2010

Table 14. TALF Collateral by Rating
Billions of dollars, as of March 31, 2010

TALF LLC, a limited liability company, was formed to purchase and manage any ABS that might be surrendered by a TALF borrower or otherwise claimed by the FRBNY in connection with its enforcement rights to the TALF collateral. In certain limited circumstances, TALF LLC may also purchase TALF program loans from the FRBNY. TALF LLC has committed to purchase, for a fee, all such assets at a price equal to the TALF loan, plus accrued but unpaid interest. Purchases of these securities are funded first through the fees received by TALF LLC and any interest TALF LLC has earned on its investments. In the event that such funding proves insufficient, the U.S. Treasury's Troubled Asset Relief Program (TARP) will provide additional subordinated debt funding to TALF LLC to finance up to $20 billion of asset purchases. Subsequently, the FRBNY will finance any additional purchases of securities by providing senior debt funding to TALF LLC. Thus, the TARP funds provide credit protection to the FRBNY. Financial information on TALF LLC is reported weekly in tables 1, 2, 8, 10, and 11 of the H.4.1 statistical release. As of March 31, 2010, TALF LLC had purchased no assets from the FRBNY.

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