Monthly Report on Credit and Liquidity Programs
and the Balance Sheet

Lending Facilities to Support Overall Market Liquidity

Lending to Depository Institutions

Recent Developments

• On March 21, 2011, the United States Supreme Court denied further review of decisions in two Freedom of Information Act suits brought by media companies for release of documents of the Board of Governors of the Federal Reserve System relating to discount window borrowers (Fox News Network, LLC v. Board of Governors, 601 F.3d 158 (2d Cir. 2010) and Bloomberg, L.P. v. Board of Governors, 601 F.3d 143 (2d Cir. 2010)). As a result, on March 31, 2011, the Board released information that was the subject of the Court's action, and also released similar information that is the subject of a related court proceeding. All of the information relates to borrowers at the discount window and the emergency lending facilities under Section 13(3) of the Federal Reserve Act; the information spans the period from August 8, 2007, to March 1, 2010. Additional information is available at www.federalreserve.gov/generalinfo/foia/servicecenter.cfm.
• Credit provided to depository institutions through the discount window increased slightly in March 2011, but remains generally around the levels seen prior to 2007. As presented in table 6, the lendable value of collateral pledged by depository institutions with discount window loans outstanding on March 30, 2011, was less than $500 million; discount window credit outstanding on that date amounted to $33 million.

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.

Table 4. Discount window credit outstanding to depository institutions
Daily average borrowing for each class of borrower over four weeks ending March 30, 2011

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 5. Concentration of discount window credit outstanding to depository institutions
For four weeks ending March 30, 2011

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 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.

On August 6, 2010, the Federal Reserve announced changes to its practices for disclosure of discount window lending information in accordance with the provisions of the Dodd-Frank Act. For discount window loans extended to depository institutions on or after July 21, 2010, the Federal Reserve will publicly disclose certain information about the transaction approximately two years after the loan was extended. The disclosure will include the name and identifying details of the depository institution, the amount borrowed, the interest rate paid, and information identifying the types and amount of collateral pledged. More detail on these changes is reported on the Federal Reserve's Discount Window website at www.frbdiscountwindow.org.

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.

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.² 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 by depository institutions under the terms and conditions specified in the Federal Reserve Banks' standard lending agreement, Operating Circular No. 10, available at www.frbservices.org/files/regulations/pdf/operating_circular_10.pdf (333 KB PDF).

Table 6. Lendable value of collateral pledged by borrowing depository institutions
Billions of dollars, as of March 30, 2011

Discount window loans are generally 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 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. 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 loan nevertheless routinely pledge collateral.

Table 7. Lendable value of securities pledged by depository institutions by rating
Billions of dollars, as of March 30, 2011

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

As presented in table 8, depository institutions that borrow from the Federal Reserve generally maintain collateral in excess of their current borrowing levels.

Table 8. Discount window credit outstanding to borrowing depository institutions--percent of collateral used
As of March 30, 2011

Term Asset-Backed Securities Loan Facility (TALF)

Recent Developments

• As of March 30, 2011, the number of TALF borrowers and loans outstanding had declined from their levels in February 2011. Prepayments by borrowers primarily contributed to the decline in loans outstanding and fully accounted for the decline in TALF borrowers. TALF LLC, a limited liability company (LLC) formed to purchase and manage assets received by the FRBNY from the TALF program, remains in operation, but as of March 30, 2011, TALF LLC had not purchased any assets from the FRBNY.

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 was authorized to extend up to $200 billion of credit to holders of eligible asset-backed securities (ABS).³ The TALF was 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 was also intended to improve market conditions for ABS more generally. TALF loans backed by commercial mortgage-backed securities (CMBS) or by ABS backed by government guaranteed loans have maturities of up to five years; all other TALF loans have three-year maturities. Using funds authorized under the Troubled Asset Relief Program (TARP) of the Emergency Economic Stabilization Act of 2008, the Treasury committed to provide $20 billion in credit protection to the FRBNY in connection with the TALF to support the $200 billion of authorized lending value under the program. This commitment was reduced to $4.3 billion in July 2010 to reflect the fact that only $43 billion of TALF loans were outstanding when the program was closed to new lending.
 

Table 9. TALF: Number of borrowers and loans outstanding
As of March 30, 2011

Eligible collateral for TALF loans included U.S. dollar-denominated ABS backed by student loans, auto loans, credit card loans, equipment loans, floorplan loans, insurance premium finance loans, loans guaranteed by the Small Business Administration (SBA), residential mortgage servicing advances, or commercial mortgages. At the time a TALF loan was extended, all eligible collateral was required to have a credit rating in the highest investment-grade rating category from two or more eligible nationally recognized statistical rating organizations (NRSROs) and could not have a credit rating below the highest investment-grade rating category from an eligible NRSRO. Certain collateral also had to pass an internal risk assessment by the FRBNY.

Additionally, all or substantially all of the credit exposures underlying eligible ABS were required to be exposures to U.S.-domiciled obligors or with respect to real property located in the United States or its territories. Except for ABS for which the underlying credit exposures are SBA-guaranteed loans, eligible newly issued ABS must have been issued on or after January 1, 2009. Eligible legacy CMBS must have been 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. Collateral would not be accepted from a particular borrower if the collateral was backed by loans originated or securitized by that borrower or its affiliate except in very limited circumstances.

The loans provided through the TALF were designed to be limited in recourse to the collateral, generally allowing borrowers the option of surrendering the collateral to the FRBNY in full satisfaction of the TALF loan. 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 haircut is a buffer which protects the FRBNY against a decline in the collateral's value. The Federal Reserve 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 presented in tables 10 and 11, respectively.

Table 10. TALF collateral by underlying loan type
Billions of dollars, as of March 30, 2011

Consistent with previous announcements, the Federal Reserve closed the TALF for new loan extensions against newly issued CMBS on June 30, 2010, and for new loans against all other types of collateral on March 31, 2010. All TALF loans were extended by the FRBNY and will mature over the next several years, with all loans maturing no later than March 30, 2015.
 

Table 11. TALF collateral by rating
Billions of dollars, as of March 30, 2011

TALF LLC

TALF LLC 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 TARP will provide additional subordinated debt funding to TALF LLC to finance up to $4.3 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, 7, 8, and 9 of the H.4.1 statistical release. As of March 30, 2011, TALF LLC had purchased no assets from the FRBNY.

Table 12A. Issuers of non-CMBS that collateralize outstanding TALF loans
As of March 30, 2011

Table 12B. Issuers of newly issued CMBS that collateralize outstanding TALF loans
As of March 30, 2011

Table 12C. Issuers of legacy CMBS that collateralize outstanding TALF loans
As of March 30, 2011

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