Annual Report 2010

Rules and Regulations

Regulation D
Reserve Requirements of Depository Institutions

[Docket No. R-1381]

On April 21, 2010, the Board approved a final rule to authorize Reserve Banks to offer interest-bearing deposits of a specified maturity, or "term deposits," to institutions that are eligible to receive earnings on balances held in their Federal Reserve accounts. Term deposits will be offered through a Term Deposit Facility and are intended to facilitate the conduct of monetary policy by providing a tool for managing the aggregate quantity of reserve balances. (See "Special Liquidity Facilities and Other Initiatives".) Term deposits are separate and distinct from balances maintained in an institution's master account at a Reserve Bank as well as from those maintained in an excess balance account. The Board also approved minor amendments to its Policy on Payment System Risk to address transactions associated with term deposits. The final rule is effective June 4, 2010.

Voting for this action: Chairman Bernanke, Vice Chairman Kohn, and Governors Warsh, Duke, and Tarullo.

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Regulation E
Electronic Fund Transfers

[Docket No. R-1377]

On March 19, 2010, the Board approved a final rule to implement the gift card provisions of the Credit Card Accountability Responsibility and Disclosure Act (the Credit Card Act). The final rule prohibits dormancy, inactivity, and service fees on gift cards, unless (1) the consumer has not used the gift certificate or card for at least one year, (2) no more than one such fee is charged per month, and (3) the consumer is given clear and conspicuous disclosures about the fees. Expiration dates for funds underlying gift cards must be at least five years after the date of issuance, or five years after the date when funds were last loaded on the card. The rule generally covers retail gift cards, which can be used to buy goods or services from a single merchant or an affiliated group of merchants, and network-branded gift cards, which are redeemable at any merchant that accepts the card brand. The rule is effective August 22, 2010.

Voting for this action: Chairman Bernanke, Vice Chairman Kohn, and Governors Warsh, Duke, and Tarullo.

On August 10, 2010, the Board approved an interim final rule with request for comment to implement legislation modifying the effective date of certain disclosure requirements applicable to gift cards under the Credit Card Act. For gift certificates, store gift cards, and general-use prepaid cards produced before April 1, 2010, the legislation and interim final rule delay the August 22, 2010, effective date of these disclosures until January 31, 2011, provided that several specified conditions are met.

Voting for this action: Chairman Bernanke and Governors Kohn, Warsh, Duke, and Tarullo.

On October 18, 2010, the Board approved a final rule implementing the January 31, 2011, effective date for certain gift cards, as specified in the interim final rule.

Voting for this action: Chairman Bernanke, Vice Chair Yellen, and Governors Warsh, Duke, Tarullo, and Raskin.

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Regulation E
Electronic Fund Transfers

Regulation DD
Truth in Savings

[Docket Nos. R-1343 and R-1315]

On May 27, 2010, the Board approved amendments to clarify certain provisions of the November 2009 final rule on Regulation E and the December 2008 final rule on Regulation DD. In particular, the amendments clarify that the Regulation E prohibition on assessing overdraft fees without a consumer's affirmative consent, or "opt in," applies to all institutions, including those that have a policy of declining ATM and one-time debit card transactions when an account has insufficient funds. For Regulation DD, the amendments address the application of the 2008 rule to retail sweep programs and clarify the terminology for overdraft fee disclosures. The amendments, which make other technical and conforming changes, are effective July 6, 2010 (except for the Regulation DD provision regarding the "Total Overdraft Fees" terminology, which is effective October 1, 2010).

Voting for this action: Chairman Bernanke, Vice Chairman Kohn, and Governors Warsh, Duke, and Tarullo.

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

[Docket No. R-1357]

On April 12, 2010, the Board, acting with the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Office of Thrift Supervision, National Credit Union Administration, and Farm Credit Administration, approved final rules to implement the registration requirements of the Secure and Fair Enforcement for Mortgage Licensing Act (S.A.F.E. Act). Under the S.A.F.E. Act, mortgage loan originators who are employees of agency-regulated institutions must register with the Nationwide Mortgage Licensing System and Registry and are generally prohibited from originating residential mortgage loans unless they register. As part of the registration process, residential mortgage loan originators must furnish information and fingerprints for background checks, and originators will receive a unique identifier that will enable consumers to access employment and other information about them from the registry. The final rules further provide that agency-regulated institutions must (1) require their employees who act as residential mortgage loan originators to comply with the S.A.F.E. Act's registration and other requirements and (2) adopt and follow written policies and procedures designed to ensure compliance with these requirements. The agencies published their final rules on July 28, 2010. The Board also approved conforming amendments to Regulation K (International Banking Operations) to include an uninsured state-licensed branch or agency of a foreign bank or commercial lending company owned or controlled by a foreign bank and any residential mortgage loan originator that it employs. The rules are effective October 1, 2010, and the 180-day registration period for mortgage loan originators subject to the agencies' rules begins January 31, 2011.

Voting for this action: Chairman Bernanke, Vice Chairman Kohn, and Governors Warsh, Duke, and Tarullo.

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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-1368]

On January 4, 2010, the Board, acting with the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and Office of Thrift Supervision, approved final rules amending the general and advanced risk-based capital adequacy frameworks to (1) eliminate the exclusion of certain consolidated asset-backed commercial paper programs from risk-weighted assets; (2) add a reservation of authority permitting the agencies to require banking organizations to treat off-balance-sheet entities as if they were consolidated for risk-based capital purposes; and (3) provide for an optional two-quarter delay, followed by an optional two-quarter partial implementation period, for most of the effects on risk-weighted assets and tier 2 capital resulting from a banking organization's implementation of Financial Accounting Standards Nos. 166 and 167. The final rule is effective March 29, 2010. Banking organizations may elect to comply with the rule as of the beginning of their first annual reporting period that begins after November 15, 2009.

Voting for this action: Chairman Bernanke, Vice Chairman Kohn, and Governors Warsh, Duke, and Tarullo.

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Regulation Z
Truth in Lending

[Docket No. R-1384]

On June 14, 2010, the Board approved a final rule to implement certain provisions of the Credit Card Act intended to ensure that penalty fees imposed by credit card issuers are reasonable and proportional to the violation. Among other changes, the rule (1) prohibits credit card issuers from charging a penalty fee of more than $25 if a consumer pays late or otherwise violates the account's terms, unless the consumer has engaged in repeated violations or the issuer can show that a higher fee represents a reasonable proportion of the costs it incurred as a result of the violations; (2) prohibits issuers from charging penalty fees that exceed the dollar amount associated with a consumer's violation; (3) prevents issuers from charging multiple penalty fees based on a single late payment or other violation of the account terms; and (4) bans "inactivity" fees, such as fees based on a consumer's failure to use the account to make new purchases. The rule also requires credit card issuers that have increased rates since January 1, 2009, to evaluate whether the reasons for the increase have changed and, if appropriate, to reduce the rate. The rule is effective August 22, 2010.

Voting for this action: Chairman Bernanke, Vice Chairman Kohn, and Governors Warsh, Duke, and Tarullo.

[Docket No. R-1378]

On August 1, 2010, the Board approved a final rule to implement a requirement in the Helping Families Save Their Homes Act that consumers receive written notice after their mortgage loan has been sold or transferred. Under the act, a purchaser or assignee that acquires a mortgage loan must provide the required disclosures in writing within 30 days. The final rule is effective January 1, 2011.

Voting for this action: Chairman Bernanke and Governors Kohn, Warsh, Duke, and Tarullo.

[Docket No. R-1366]

On August 11, 2010, the Board approved an interim rule with request for comment that revises the disclosure requirements for closed-end mortgage loans. Under the interim rule, which implements certain requirements of the Mortgage Disclosure Improvement Act, creditors extending consumer credit secured by real property or a dwelling must disclose certain summary information about interest rates and payment changes in a tabular format, including the initial interest rate together with the corresponding monthly payment. The disclosures must also include a statement that consumers might not be able to avoid increased payments by refinancing their loans. For adjustable-rate or step-rate loans, creditors must disclose the maximum interest rate and payment that can occur during the first five years and a "worst-case" example showing the possible maximum rate and payment due over the life of the loan. The rule also requires creditors to disclose certain features, such as balloon payments or options to make only minimum payments, that will cause loan amounts to increase. The interim final rule is effective October 25, 2010, and compliance is mandatory January 30, 2011.

Voting for this action: Chairman Bernanke and Governors Kohn, Warsh, Duke, and Tarullo.

On December 21, 2010, the Board approved an interim rule with request for comment to clarify certain aspects of the August 11, 2010, interim rule (published in September 2010), in response to public comments. This revised interim rule is effective January 30, 2011, and compliance is mandatory October 1, 2011.

Voting for this action: Chairman Bernanke, Vice Chair Yellen, and Governors Warsh, Duke, Tarullo, and Raskin.

[Docket No. R-1366]

On August 11, 2010, the Board approved a final rule to protect mortgage borrowers from unfair or abusive lending practices that can arise from certain loan-originator compensation practices. The final rule prohibits payments to loan originators, including mortgage brokers and loan officers, that are based on the terms or conditions of a transaction, other than the amount of credit extended. The final rule also prohibits a loan originator receiving compensation directly from a consumer from also receiving compensation from the lender or another party. In addition, the final rule prohibits loan originators from directing, or "steering," consumers to a loan that is not in the consumer's interest in order to increase the originator's compensation. The final rule is effective April 1, 2011.

Voting for this action: Chairman Bernanke and Governors Kohn, Warsh, Duke, and Tarullo.

[Docket No. R-1394]

On October 18, 2010, the Board approved an interim final rule with request for comment to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) that establish new requirements for appraiser independence in consumer credit transactions secured by a consumer's principal dwelling. The rule ensures that real estate appraisers are free to use their independent professional judgment, without influence or pressure from parties who may have an interest in a transaction. The rule also seeks to ensure that appraisers receive customary and reasonable payments for their services. Among other provisions, the interim final rule (1) prohibits coercion and other similar actions designed to cause appraisers to base the appraised value of properties on factors other than their independent judgment, (2) prohibits appraisers and appraisal management companies hired by lenders from having financial or other interests in the properties or the credit transactions, and (3) requires creditors or settlement service providers that have information about appraiser misconduct to file reports with the appropriate state licensing authorities. The interim final rule is effective December 27, 2010, and compliance is mandatory April 1, 2011.

Voting for this action: Chairman Bernanke, Vice Chair Yellen, and Governors Warsh, Duke, Tarullo, and Raskin.

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Regulation Z
Truth in Lending

Regulation AA
Unfair or Deceptive Acts or Practices

[Docket Nos. R-1370, R-1286, and R-1383]

On January 7, 2010, the Board approved a final rule amending Regulation Z to implement certain provisions of the Credit Card Act. The final rule protects consumers who use credit cards from a number of costly practices. In particular, the rule (1) protects consumers from unexpected increases in credit card interest rates by generally prohibiting increases in a rate during the first year after an account is opened and increases in a rate that applies to an existing credit card balance; (2) prohibits creditors from issuing a credit card to a consumer who is younger than the age of 21, unless certain requirements are met; (3) requires creditors to obtain a consumer's consent before charging fees for transactions that exceed the credit limit; (4) limits the high fees associated with subprime credit cards; and (5) prohibits creditors from allocating payments in ways that maximize interest charges. In addition, the rule bans creditors from imposing interest charges using the "two-cycle" billing method, in which charges are based on balances on days in the current billing cycle and in the previous billing cycle. The Board also withdrew certain amendments to Regulation Z and Regulation AA because those amendments were superseded. The final rule is effective February 22, 2010. Compliance with most aspects of the rule is mandatory July 1, 2010, although compliance with certain provisions is mandatory February 22, 2010.

Voting for this action: Chairman Bernanke, Vice Chairman Kohn, and Governors Warsh, Duke, and Tarullo.

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Regulation BB
Community Reinvestment

[Docket No. R-1360]

On August 31, 2010, the Board, acting with the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and Office of Thrift Supervision, approved a joint final rule to implement a provision of the Higher Education Opportunity Act that requires the agencies to consider low-cost education loans provided to low-income borrowers when assessing an institution's record of meeting community credit needs under the Community Reinvestment Act (CRA). The joint final rule also incorporates a CRA provision that allows the agencies to consider a financial institution's capital investment, loan participation, and other ventures undertaken in cooperation with minority- or women-owned financial institutions and low-income credit unions as a factor when assessing the institution's CRA record. The joint final rule is effective November 3, 2010.

Voting for this action: Chairman Bernanke and Governors Kohn, Warsh, Duke, and Tarullo.

[Docket No. R-1387]

On November 22, 2010, the Board, acting with the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and Office of Thrift Supervision, approved a joint final rule amending the agencies' CRA regulations to revise the term "community development" to include loans, investments, or services of the type eligible for funding under the Neighborhood Stabilization Program that benefit certain areas designated by the Department of Housing and Urban Development. The joint final rule is effective January 19, 2011.

Voting for this action: Chairman Bernanke, Vice Chair Yellen, and Governors Warsh, Duke, Tarullo, and Raskin.

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Rules Regarding Access to Personal Information under the Privacy Act of 1974

[Docket No. R-1313]

On October 4, 2010, the Board approved a final rule amending its Privacy Act regulation to waive copying fees for Privacy Act requests by current or former Board employees or applicants for Board employment and to permit current and former Board employees to make Privacy Act requests in person or in writing to the Board office that maintains the record. The rule also permits certain consultations regarding the disclosure of medical records, changes the time limits for responding to requests for access to information, updates exemptions, and makes minor editorial and technical changes for clarity and consistency with the Board's published systems of records. The final rule is effective October 18, 2010.

Voting for this action: Chairman Bernanke and Governors Warsh, Duke, and Tarullo.

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Policy Statements and Other Actions

Maximum Maturity of Primary Credit Loans

On February 17, 2010, the Board approved a reduction in the maximum maturity of primary credit loans at the discount window for most depository institutions from 28 days to overnight, effective March 18, 2010. Before August 2007, the maximum available term of primary credit was generally overnight but was subsequently lengthened in order to enhance banks' access to term funds and thus support their ability to lend to households and businesses. The maximum available term was lengthened to 30 days (on August 17, 2007) and to 90 days (on March 16, 2008) and then shortened to 28 days (on November 12, 2009).

Voting for this action: Chairman Bernanke, Vice Chairman Kohn, and Governors Warsh, Duke, and Tarullo.

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Interagency Questions and Answers Regarding Community Reinvestment

[Docket No. OP-1349]

On March 1, 2010, the Board, acting with the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and Office of Thrift Supervision, approved final revised Interagency Questions and Answers Regarding Community Reinvestment. The revisions include examples of ways an institution could determine that its community services are targeted to low- and moderate-income individuals and a discussion of reporting requirements for community development loans. The revised questions and answers, which consolidate and supersede the agencies' previously published versions, are effective March 11, 2010.

Voting for this action: Chairman Bernanke, Vice Chairman Kohn, and Governors Warsh, Duke, and Tarullo.

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Interagency Policy Statement on Funding and Liquidity Risk Management

[Docket No. OP-1362]

On March 12, 2010, the Board, acting with the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Office of Thrift Supervision, National Credit Union Administration, and the Conference of State Bank Supervisors, approved an interagency statement to provide depository institutions with consistent supervisory expectations regarding sound practices for managing funding and liquidity risk. The policy statement summarizes the agencies' past principles in this area, and when appropriate, supplements them with the "Principles for Sound Liquidity Risk Management and Supervision," issued by the Basel Committee on Banking Supervision in September 2008.

Voting for this action: Chairman Bernanke, Vice Chairman Kohn, and Governors Warsh, Duke, and Tarullo.

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Correspondent Concentration Risks

[Docket No. OP-1369]

On April 26, 2010, the Board, acting with the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and Office of Thrift Supervision, approved final interagency guidance on managing concentration risks arising from correspondent banking relationships. The guidance highlights the need for financial institutions to identify, monitor, and manage credit and funding concentrations to other institutions on a stand-alone and organization-wide basis. In addition, the guidance addresses the supervisory expectation that financial institutions should perform appropriate due diligence on all credit exposures to, and funding transactions with, other financial institutions as part of their risk-management policies and procedures. The policy is effective May 4, 2010.

Voting for this action: Chairman Bernanke, Vice Chairman Kohn, and Governors Warsh, Duke, and Tarullo.

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Guidance on Sound Incentive Compensation Policies

[Docket No. OP-1374]

On June 16, 2010, the Board, acting with the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and Office of Thrift Supervision, approved final interagency guidance on incentive compensation policies at banking organizations. The guidance is designed to ensure that incentive compensation arrangements do not encourage imprudent risk taking and do not undermine the safety and soundness of the organization or create undue risks to the financial system. The guidance applies not only to top-level managers but also to other employees who have the ability to materially affect the risk profile of an organization, either individually or as part of a group. The guidance is effective June 25, 2010.

Voting for this action: Chairman Bernanke, Vice Chairman Kohn, and Governors Warsh, Duke, and Tarullo.

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Reverse Mortgage Products: Guidance for Managing Compliance and Reputation Risks

On August 2, 2010, the Board approved final interagency guidance, issued by the Federal Financial Institutions Examination Council on behalf of its members, addressing reverse mortgages, which are loan products typically offered to elderly consumers. The guidance emphasizes the consumer protection concerns raised by these products and stresses the importance of mitigating their compliance and reputational risks. The guidance is effective October 18, 2010.

Voting for this action: Chairman Bernanke and Governors Kohn, Warsh, Duke, and Tarullo.

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Community Depository Institutions Advisory Council

On September 10, 2010, the Board approved the establishment of an advisory council to represent insured community depository institutions. Members of the Community Depository Institutions Advisory Council (CDIAC) will be selected from the representatives of banks, thrift institutions, and credit unions who serve on newly created local advisory councils at the 12 Reserve Banks. CDIAC will replace the Thrift Institutions Advisory Council. The Reserve Bank councils are expected to begin meeting in 2011, with meetings of CDIAC to follow later in the year.

Voting for this action: Chairman Bernanke and Governors Warsh, Duke, and Tarullo.

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Office of Financial Stability Policy and Research

On October 26, 2010, the Board approved the establishment of the Office of Financial Stability Policy and Research to bring together economists, banking supervisors, markets experts, and other Federal Reserve staff to support the Board's financial stability responsibilities, including its expanded responsibilities in this area under the Dodd-Frank Act. The office will develop and coordinate staff efforts to identify and analyze potential risks to the financial system and the broader economy by, among other activities, monitoring asset prices, leverage, financial flows, and other market-risk indicators; following developments at key institutions; and analyzing policies to promote financial stability. It will also support the supervision of large financial institutions and the Board's participation on the Financial Stability Oversight Council.

Voting for this action: Chairman Bernanke, Vice Chair Yellen, and Governors Warsh, Duke, Tarullo, and Raskin.

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Interagency Appraisal and Evaluation Guidelines

[Docket No. OP-1338]

On December 1, 2010, the Board, acting with the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Office of Thrift Supervision, and National Credit Union Administration, approved final supervisory guidance on sound practices by financial institutions for real estate appraisals and evaluations. The guidelines, which replace 1994 appraisal guidelines, (1) address the agencies' recent supervisory issuances on appraisal practices; (2) address advancements in information technology used in collateral valuation practices; and (3) clarify standards for the industry's appropriate use of analytical methods and technological tools in developing evaluations. Financial institutions should review their appraisal and evaluation programs to ensure they are consistent with the guidelines. The guidelines are effective December 10, 2010.

Voting for this action: Chairman Bernanke, Vice Chair Yellen, and Governors Warsh, Duke, Tarullo, and Raskin.

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Office of Diversity and Inclusion

On December 16, 2010, the Board approved the establishment of the Office of Diversity and Inclusion in accordance with a provision of the Dodd-Frank Act that also applies to the Reserve Banks and other federal financial regulatory agencies. The office will incorporate the activities of the Board's current Equal Employment Opportunity Programs Office, as well as foster diversity in the Board's procurements and assist with developing standards to assess the diversity practices of the entities the Board regulates. The office will work with Board staff in areas that include procurement, staffing, banking supervision and regulation, and consumer and community affairs to carry out its statutory responsibilities.

Voting for this action: Chairman Bernanke, Vice Chair Yellen, and Governors Warsh, Duke, Tarullo, and Raskin.

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Special Liquidity Facilities and Other Initiatives

Special Liquidity Facilities

On January 27, 2010, the Federal Reserve announced that the following special liquidity facilities would close as scheduled on February 1, 2010, in light of improved functioning of financial markets: Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, Commercial Paper Funding Facility, Primary Dealer Credit Facility, and Term Securities Lending Facility. The Federal Reserve also announced the final Term Auction Facility (TAF) amounts and dates ($50 billion in 28-day credit on February 8 and $25 billion in 28-day credit on March 8, 2010) and affirmed that the expiration dates for the Term Asset-Backed Securities Loan Facility (TALF) remained set at June 30, 2010, for loans backed by newly issued commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral. For more information on the establishment and purposes of these and the Federal Reserve's other special facilities and initiatives, see the Annual Reports for 2008 and 2009.

On February 17, 2010, the Board approved an increase in the minimum bid rate for the TAF from 1/4 percentage point to 1/2 percent for the final auction on March 8, 2010. (See "Discount Rates for Depository Institutions in 2010" for further discussion of the TAF.)

Voting for this action: Chairman Bernanke, Vice Chairman Kohn, and Governors Warsh, Duke, and Tarullo.

On July 9, 2010, the Board approved a request by the Department of the Treasury (Treasury) to reduce from $20 billion to $4.3 billion the credit protection provided for the TALF under the Troubled Asset Relief Program (TARP). Any losses on the TALF program, which closed on June 30, 2010, with $43 billion in loans outstanding, would first be absorbed by the accumulated excess of the TALF loan interest payments over the Federal Reserve's cost of funds and then by the TARP funds.

Voting for this action: Chairman Bernanke and Governors Kohn, Warsh, Duke, and Tarullo.

On December 1, 2010, the Board posted detailed information on its public website about transactions conducted through the Federal Reserve's special liquidity facilities from December 1, 2007, to July 21, 2010, in accordance with the Dodd-Frank Act. Similar transaction-level detail was provided for the Federal Reserve's dollar liquidity swaps with foreign central banks and for purchases of agency mortgage-backed securities. The transaction-level details available include the name of the institution, the amount of the transaction, the interest rate charged, information about collateral, and other relevant terms of the programs.

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Other Initiatives

American International Group, Inc.

On September 29, 2010, the Board authorized the Federal Reserve Bank of New York (Reserve Bank) to enter into a recapitalization plan for the American International Group, Inc. (AIG). The recapitalization plan is designed to restructure and facilitate repayment of the financial support provided to AIG by the Reserve Bank and Treasury. The plan consists of the following basic terms:

• Repayment of the outstanding balance (including all accrued interest and fees) on AIG's revolving credit facility with the Reserve Bank on an accelerated basis using the cash proceeds from the dispositions of certain AIG assets, notably the initial public offering of the AIA Group Limited (AIA) and the sale of American Life Insurance Company (ALICO), and termination of the facility.
• AIG's purchase of up to $22 billion of the Reserve Bank's preferred interests in two special-purpose vehicles that owned AIA and ALICO, respectively (the Reserve Bank had earlier taken the preferred interests in partial repayment of the revolving credit facility). To fund the purchase of the preferred interests, AIG would draw on Treasury's preferred stock commitment for AIG under the TARP and then transfer the preferred interests to Treasury in consideration for the TARP funding.
• Repayment of the Reserve Bank's remaining preferred interests with the proceeds of the dispositions of AIA and ALICO, and retention of any unpaid preferred interests by the Reserve Bank.
• Conversion of Treasury's outstanding preferred equity interests in AIG into common stock of AIG.
• Conversion of the preferred equity interest issued by AIG and held to the AIG Credit Facility Trust as a condition of the Reserve Bank's revolving credit facility into common stock of AIG and transfer of the common stock to Treasury.

Voting for this action: Chairman Bernanke and Governors Warsh, Duke, and Tarullo.

Term Deposit Facility

On May 7, 2010, the Board approved up to five small-value offerings of term deposits under the Term Deposit Facility (TDF). (The Board had previously authorized Reserve Banks to offer term deposits to eligible institutions. See "Rules and Regulations".) The small-value offerings are designed to ensure the effectiveness of TDF operations and provide eligible institutions with an opportunity to gain familiarity with term deposit procedures. The Board also approved a basic structure for the small-value TDF offerings. Similar to many money market instruments, the term deposits offered will be simple fixed-rate instruments with maturities of 84 days or less and will be issued primarily through competitive single-price auctions. TDF offerings will also include a noncompetitive bidding option to ensure access to term deposits for smaller institutions.

Voting for this action: Chairman Bernanke, Vice Chairman Kohn, and Governors Warsh, Duke, and Tarullo.

On September 7, 2010, the Board approved a program of ongoing small-value TDF auctions. Although the terms and frequency of these auctions may evolve over time, the Board anticipates that they will be held about every other month.

Voting for this action: Chairman Bernanke and Governors Warsh, Duke, and Tarullo.

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Discount Rates for Depository Institutions in 2010

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 14 days, subject to review and determination by the Board of Governors.

Primary Credit

Primary credit, the Federal Reserve's main lending program for depository institutions, 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 and 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.

Over the period from mid-August 2007 to early 2010, the Federal Reserve allowed depository institutions to borrow primary credit for longer periods to address liquidity pressures during the financial crisis. At the beginning of 2010, the maximum maturity of primary credit was 90 days, renewable by the borrower. Effective January 14, 2010, the maximum maturity of such financing was reduced to 28 days in light of improvement in financial market conditions. On February 18, 2010, the Board announced a further reduction in the typical maturity for primary credit loans to overnight effective March 18, 2010.

During 2010, the Board approved one change to the primary credit rate, an increase from 1/2 percent to 3/4 percent effective February 19, 2010.²

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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 2010, 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 1-1/4 percent and 1/4 percent, respectively.³

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Term Auction Facility Credit

In December 2007, the Federal Reserve established a temporary Term Auction Facility (TAF). Under the TAF, the Federal Reserve auctioned term funds to depository institutions that were in generally sound financial condition and were eligible to borrow under the primary credit program. The amount of each auction was determined in advance by the Federal Reserve, and the interest rate on TAF credit was determined as the rate at which all bids could be fulfilled, up to the maximum auction amount and subject to a minimum bid rate. Originally, the minimum bid rate for TAF auctions was determined based on a measure of the average expected overnight federal funds rate over the term of the credit being auctioned. For TAF auctions from January 2009 to February 2010, the minimum bid rate was set at a level equal to the rate of interest that banks earn on excess reserve balances, which was 1/4 percent over this period. On February 18, 2010, the Board announced that it had raised the minimum bid rate to 1/2 percent.

On June 25, 2009, in light of the improvement in financial conditions and reduced usage of the TAF, the Federal Reserve trimmed the size of upcoming TAF auctions. The Federal Reserve anticipated that, if market conditions continued to improve in coming months, TAF funding would be reduced gradually further. Throughout the second half of 2009, the Federal Reserve gradually reduced the amounts provided under the TAF. On January 27, 2010, the Federal Reserve announced that the final TAF auction would take place on March 8, 2010. There were a total of three TAF auctions held in 2010: $75 billion in 28-day credit was offered on January 11, $50 billion in 28-day credit was offered on February 8, and $25 billion in 28-day credit was offered at the final auction on March 8.⁴

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Votes on Changes to Discount Rates for Depository Institutions

About every two weeks during 2010, the Board approved proposals by the 12 Reserve Banks to maintain the formulas for computing the secondary and seasonal credit rates. Until the final TAF auction was conducted, the Board also approved the auction procedure for determining the rate for the TAF about every two weeks. Details on the one action by the Board to approve changes to the primary credit rate are provided below.

February 17, 2010. Effective February 19, 2010, the Board approved establishment of the rate for discounts and advances under the primary credit program (primary credit rate) of 3/4 percent (an increase from 1/2 percent) for the 12 Federal Reserve Banks.

Voting for this action: Chairman Bernanke, Vice Chairman Kohn, and Governors Warsh, Duke, and Tarullo.

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