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.
• Recent TAF auctions have been undersubscribed and, as a result, the auction rate has been equal to the minimum bid rate of 25 basis points for some time.
• The July TAF auctions will be reduced in size to $125 billion. The Federal Reserve anticipates that TAF auction sizes will gradually be reduced further if market conditions continue to improve in coming months.

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 time 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 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. In December 2007, the Federal Reserve introduced the TAF, which provides credit through an auction mechanism to depository institutions in generally sound financial condition. 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.

Table 4. Discount Window Credit Outstanding to Depository Institutions
Daily average borrowing for each class of borrower over the four weeks ending June 24, 2009

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. Discount Window Credit Outstanding to Depository Institutions--Concentration at Largest Borrowers
For the four weeks ending June 24, 2009

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,¹ to identify potentially problematic institutions and classify them according to the severity of the risk they pose to the Federal Reserve. 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 Pledged by Depository Institutions

Recent Developments

• As indicated in Table 6, total collateral pledged by borrowing depository institutions was about $900 billion as of June 24, almost three times the amount of credit outstanding.

Table 6. Lending to Depository Institutions--Collateral Pledged by Borrowers
As of June 24, 2009

Background

All extensions of 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. Borrowers may be required to pledge additional collateral if their 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).

Table 7. Securities Pledged by Depository Institutions by Rating
As of June 24, 2009

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. Institutions may not pledge as collateral any instruments that they or their 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.

Collateral

As shown in Table 8, most depository institutions that borrow from the Federal Reserve maintain collateral well in excess of their current borrowing levels.

Table 8. Discount Window Credit Outstanding to Depository Institutions--Percent of Collateral Used
As of June 24, 2009

Lending to Primary Dealers

Recent Developments

• Borrowing at the Term Securities Lending Facility (TSLF) continued to decline in recent weeks as a result of further improvement in the conditions in money markets. There has been no borrowing at the Primary Dealer Credit Facility (PDCF) since mid-May.
• On June 25, the Federal Reserve announced the extension of the PDCF and TSLF through February 1, 2010. However, starting in July, TSLF Schedule 1 and Term Securities Lending Facility Options Program (TOP) auctions will be suspended.

Table 9. Credit Outstanding to Primary Dealers
As of June 24, 2009

Background

On March 16, 2008, the Federal Reserve announced the creation of the PDCF, which is an overnight loan facility that provides funding to primary dealers and helps foster improved conditions in financial markets more generally. The Federal Reserve Board has authorized the extension of credit from the PDCF through February 1, 2010. While there is currently no borrowing under the PDCF, the Board believes that it is appropriate to continue to provide the PDCF as a backstop facility in the near term, while financial market conditions remain somewhat fragile.

PDCF credit is fully secured by collateral with appropriate haircuts--that is, the value of the collateral exceeds the value of the loan extended. Initially, eligible collateral was restricted to investment-grade securities. On September 14, 2008, the eligible set of collateral was broadened to closely match the types of instruments that can be pledged in the tri-party repurchase agreement systems of the two major clearing banks. On September 21 and November 23, 2008, the Federal Reserve Board authorized the extension of credit to a set of other securities dealers on terms very similar to the PDCF. Credit extended under either program is reported in table 1 of the H.4.1 statistical release as "Primary dealer and other broker-dealer credit" and is included in "Other loans" in tables 9 and 10 of the H.4.1 release.

On March 11, 2008, the Federal Reserve announced the creation of the TSLF. Under the TSLF, the FRBNY lends Treasury securities to primary dealers for 28 days against eligible collateral in two types of auctions. For so-called "Schedule 1" auctions, the eligible collateral consists of Treasury securities, agency securities, and agency-guaranteed mortgage-backed securities. For "Schedule 2" auctions, the eligible collateral includes Schedule 1 collateral plus highly rated private securities. In mid-2008, the Federal Reserve introduced the Term Securities Lending Facility Options Program (TOP), which offers options to primary dealers to draw upon short-term, fixed-rate TSLF loans from the SOMA portfolio in exchange for program-eligible collateral. The TOP program is intended to enhance the effectiveness of TSLF by offering added liquidity over periods of heightened collateral market pressures, such as quarter-end dates. The Federal Reserve Board has authorized the extension of credit from the TSLF through February 1, 2010. TSLF Schedule 1 and TOP auctions, however, were suspended effective July 2009 in light of considerably lower use of the facility.

Table 10. Concentration of Borrowing at the PDCF and TSLF
As of June 24, 2009

The TSLF and TOP programs support the liquidity of primary dealers and foster improved conditions in financial markets more generally. Securities lent through these programs are reported in table 1A of the H.4.1 statistical release.

In addition to the TSLF and TOP, the Federal Reserve has long operated an overnight securities lending facility as a vehicle to address market pressures for specific Treasury securities that are particularly sought after. Amounts outstanding under that program are, generally, fairly modest, and these are also reported in table 1A of the H.4.1 statistical release.

Collateral

Eligible collateral for loans extended through the PDCF includes all assets eligible for tri-party repurchase agreement arrangements through the major clearing banks as of September 12, 2008. The amount of PDCF credit extended to any dealer may not exceed the lendable value of eligible collateral that the dealer has provided to the FRBNY. The collateral is valued by the clearing banks; values are based on prices reported by a number of private-sector pricing services widely used by market participants. Loans extended under the PDCF are made with recourse beyond the collateral provided by the primary dealer entity itself.

Table 11. PDCF Collateral
As of June 24, 2009

Table 12. PDCF Collateral by Rating
As of June 24, 2009

Transactions under the TSLF involve lending securities rather than cash; a dealer borrows Treasury securities from the Federal Reserve and provides another security as collateral. Eligible collateral is determined by the Federal Reserve. Currently, two schedules of collateral are defined. Schedule 1 collateral is Treasury, agency, and agency-guaranteed mortgage-backed securities. Schedule 2 collateral is investment-grade corporate, municipal, mortgage-backed, and asset-backed securities, as well as Schedule 1 collateral. Haircuts on posted collateral are determined by the FRBNY using methods consistent with current market practices. Breakdowns of TSLF collateral by asset type and credit rating are shown in Tables 13 and 14, respectively.

Table 13. TSLF Collateral
As of June 24, 2009

Table 14. TSLF Collateral by Rating
As of June 24, 2009

Commercial Paper Funding Facility (CPFF)

Recent Developments

• A significant portion of maturing paper in the CPFF over recent weeks has not been rolled over. Improvements in market conditions have allowed some borrowers to obtain financing from private investors in the commercial paper market or from other sources.
• On June 25, the Federal Reserve announced that the CPFF will be extended through February 1, 2010.

Background

The CPFF is a facility, authorized under section 13(3) of the Federal Reserve Act, that supports liquidity in the commercial paper markets. The CPFF provides a liquidity backstop to U.S. issuers of commercial paper through a specially created limited liability company (LLC) called the CPFF LLC. This LLC purchases three-month unsecured and asset-backed commercial paper directly from eligible issuers. The 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 cumulated upfront fees paid by the issuers. Breakdowns of commercial paper held in the CPFF LLC, by type and credit rating, are shown in Tables 16 and 17, respectively.

Table 15. CPFF Concentration of Largest Issuers
For the four weeks ending June 24, 2009

Table 16. CPFF Commercial Paper Holdings by Type
As of June 24, 2009

Table 17. CPFF Commercial Paper Holdings by Rating
As of June 24, 2009

The CPFF was announced on October 7, 2008. It 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, 9, and 10 of the H.4.1 statistical release, and primary accounts of the LLC are presented in table 7 of the H.4.1. The Federal Reserve Board has authorized the extension of credit from the CPFF through February 1, 2010.

Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF)

Recent Developments

• The amount of credit outstanding under the AMLF has declined over recent weeks in concert with the overall improvement in funding markets.
• On June 25, the Federal Reserve announced that the AMLF will be extended through February 1, 2010. In addition, a redemption threshold was established for use of the facility; under this requirement, a money market mutual fund (MMMF) must experience material outflows--defined as at least 5 percent of net assets in a single day or at least 10 percent of net assets within the prior five business days--before asset-backed commercial paper (ABCP) that it sells would be eligible collateral for the AMLF.

Table 18. AMLF Number of Borrowers and Amount Outstanding
Daily average for the four weeks ending June 24, 2009

Background

The AMLF is a lending facility that finances the purchases of high-quality asset-backed commercial paper from money market mutual funds (MMMFs) by U.S. depository institutions and bank holding companies. The program is intended to assist money funds that hold such paper to meet the demands for redemptions by investors and to foster liquidity in the ABCP market and money markets more generally. The loans extended through the AMLF are non-recourse loans; as a result, the Federal Reserve has rights only to the collateral securing the loan if the borrower elects not to repay. To help ensure that the AMLF is used for its intended purpose of providing a temporary liquidity backstop to MMMFs, the Federal Reserve has established a redemption threshold for use of the facility. Under this requirement, a MMMF must experience material outflows--defined as at least 5 percent of net assets in a single day or at least 10 percent of net assets within the prior five business days--before asset-backed commercial paper (ABCP) that it sells would be eligible collateral for AMLF loans to depository institutions and bank holding companies. Any eligible ABCP purchased from a MMMF that has experienced redemptions at these thresholds could be pledged to AMLF at any time within the five business days following the date that the threshold level of redemptions was reached.

The initiation of the AMLF, announced on September 19, 2008, relied on authority under section 13(3) of the Federal Reserve Act. It is administered by the Federal Reserve Bank of Boston, which is authorized to make AMLF loans to eligible borrowers in all 12 Federal Reserve Districts. Lending through the AMLF is presented in table 1 of the H.4.1 statistical release and is included in "Other loans" in tables 9 and 10 of the H.4.1. The Federal Reserve Board has authorized extension of credit through the AMLF through February 1, 2010.

Collateral

Collateral eligible for the AMLF is limited to ABCP that:

• was purchased by the borrower on or after September 19, 2008 from a registered investment company that holds itself out as a MMMF and has experienced recent material outflows;
• was purchased by the borrower at the mutual fund's acquisition cost as adjusted for amortization of premium or accretion of discount on the ABCP through the date of its purchase by the borrower;
• is not rated lower than A1, P1, or F1 at the time it is pledged to the Federal Reserve Bank of Boston (this would exclude paper that is rated A1/P1/F1 but is on watch for downgrade by any major rating agency);
• was issued by an entity organized under the laws of the United States or a political subdivision thereof under a program that was in existence on September 18, 2008; and
• has a stated maturity that does not exceed 120 days if the borrower is a bank, or 270 days if the borrower is a non-bank.

The qualifying ABCP must be transferred to the Federal Reserve Bank of Boston's restricted account at the Depository Trust Company before an advance, collateralized by that ABCP, will be approved. The collateral is valued at the amortized cost (as defined in the Letter of Agreement) of the eligible ABCP pledged to secure an advance. Advances made under the facility are made without recourse, provided the requirements in the Letter of Agreement are met. A breakdown of AMLF collateral by credit rating is shown in Table 19.

Table 19. AMLF Collateral by Rating
As of June 24, 2009

Term Asset-Backed Securities Loan Facility (TALF)

Recent Developments

• TALF subscriptions in June supported primary issuance of 13 ABS deals worth a total of about $16.4 billion, of which approximately $11 billion was financed through the TALF. No loan requests were submitted at the first CMBS TALF operation on June 16.
• At the July 7 TALF operation, there were approximately $5 billion in loan requests, supporting issuance of nine ABS deals worth a total of about $12 billion.

Table 20. TALF: Number of Borrowers and Loans Outstanding
As of June 24, 2009

Background

On November 25, 2008, the Federal Reserve announced the creation of the TALF under 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 the market conditions for ABS more generally. The Federal Reserve Board has authorized extension of credit through the TALF until December 31, 2009.

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 approved rating agencies and do not have a credit rating below the highest investment-grade rating category from a major rating agency. The loans provided through the TALF are non-recourse loans, the Federal Reserve has rights only to the collateral securing the loan in the event that the borrower elects not to repay. 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. The U.S. Treasury is providing protection against losses of up to $20 billion to the FRBNY using funds authorized under the Troubled Assets Relief Program (TARP). The loan from the FRBNY is senior to the TARP funds. Thus, the TARP funds serve as a "first loss" position in the disposition special-purpose vehicle in the event the borrower's haircut does not fully absorb the decline in the collateral's value.

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 asset-backed securities, 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 providing additional funds from the TARP.

On March 19, the Federal Reserve Board announced that starting in April, the set of eligible collateral for TALF loans was being expanded to include ABS backed by loans or leases related to business equipment, leases of vehicle fleets, floorplan loans, and mortgage servicing advances.

On March 23, the Federal Reserve and the Treasury announced that they were planning on expanding the list of eligible collateral for TALF loans to include previously issued securities--so-called "legacy securities"--as a complement to the Treasury's Public Private Investment Program. Eligible securities are expected to include certain non-agency residential mortgage-backed securities (RMBS) that were originally rated AAA when issued and outstanding commercial mortgage-backed securities and ABS that are rated AAA.

On May 1, the Federal Reserve announced that, starting in June 2009, newly issued CMBS and securities backed by insurance premium finance loans would be eligible collateral under the TALF. The Federal Reserve also authorized TALF loans with maturities of five years, available for the June funding, to finance purchases of CMBS, ABS backed by student loans, and ABS backed by loans guaranteed by the Small Business Administration. 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 May 19, the Federal Reserve announced that, starting in July 2009, certain high-quality CMBS issued before January 1, 2009 (legacy CMBS) would become eligible collateral under the TALF. The Federal Reserve indicated that eligible newly issued and legacy CMBS must have at least two AAA ratings from a list of approved ratings agencies--DBRS, Fitch, Moody's Investors Service, Realpoint, or Standard & Poor's--and must not have a rating below AAA from any of these rating agencies. More broadly, the Federal Reserve announced that it was formalizing procedures for determining the set of rating agencies whose ratings would be accepted for various types of eligible collateral in the Federal Reserve's credit programs.

Collateral and Risk Management

Under the TALF, the FRBNY lends on a non-recourse basis to holders of certain asset-backed securities (ABS) backed by consumer, business, and commercial mortgage loans. Eligible collateral for the TALF includes U.S. dollar-denominated ABS that (1) have a long-term credit rating in the highest investment-grade rating category (for example, AAA) from two or more rating agencies and (2) do not have a long-term credit rating below the highest investment-grade rating category from a single rating agency. 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, floor plan loans, mortgage servicing advances, insurance premium finance loans, commercial mortgages, and 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 will be secured by the ABS collateral, with the FRBNY lending an amount equal to the market value of the ABS less a haircut. 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. In addition, the U.S. Treasury Department--under the Troubled Assets Relief Program (TARP) of the Emergency Economic Stabilization Act of 2008--will provide $20 billion of credit protection to the FRBNY in connection with the TALF. Breakdowns of TALF collateral by underlying credit exposure and credit rating are shown in Tables 21 and 22, respectively.

Table 21. TALF Collateral by Underlying Credit Exposure
As of June 24, 2009

Table 22. TALF Collateral by Rating
As of June 24, 2009

Table 23. Issuers of Securities that Collateralize Outstanding TALF Loans
As of June 24, 2009

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