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The Discount Window – Overcoming the Stigma of “Lender of Last Resort”: The Discount Window – Overcoming the Stigma of “Lender of Last Resort” “Call the Fed” Audio Conference May 2, 2006 Rick Miller Director, Credit and Risk Management Federal Reserve Bank of San Francisco

Discount WindowAgenda: Discount Window Agenda Purposes and Functions Types of Credit/Structure Preparing to Borrow “Stigma” and the Reluctance to Borrow Summary of Major Points Questions

Discount WindowPurposes and Functions : Discount Window Purposes and Functions Acting as a safety valve in relieving pressures in reserve markets Plays a complementary role in conducting monetary policy Relieving liquidity strains in a depository institution and/or the banking system Sudden and unexpected loss of large depositor Unusually strong loan demand Ensuring the basic stability of the payment system by supplying liquidity during times of systemic stress Local or national calamity

Discount WindowPurposes and Functions: Discount Window Purposes and Functions Cover an overdraft in your Federal Reserve Account Unexpected large debit late in the day Missed deadline for drawdown at correspondent or FHLB Meet reserve requirements Satisfy customer needs Central themes: Short-term, generally overnight Contingent funding source

Discount WindowTypes of Credit/Structure: Discount Window Types of Credit/Structure Primary credit Generally sound depository institutions Secondary credit Unsound depository institutions Seasonal credit Small institutions generally under $500 million in deposits Demonstrate seasonal swings in either deposit or loan flows, or both

Discount WindowTypes of Credit/Structure: Discount Window Types of Credit/Structure Priced above the FOMC’s target for the federal funds rate (currently 5.75%)* Available to depository institutions in “sound” overall condition Minimal administration No restrictions on the borrower’s use of the funds Generally short-term, i.e., overnight * As of 04/20/06

Discount WindowPreparing to Borrow: Discount Window Preparing to Borrow Discount Window Eligibility Any depository institution that maintains reservable transaction accounts or nonpersonal time deposits U.S. branches and agencies of foreign banks that hold reserves Bankers’ banks and corporate credit unions are not eligible unless they voluntarily maintain reserves

Discount Window Preparing to Borrow: Discount Window Preparing to Borrow Primary Credit Eligibility Composite CAMELS 1, 2, or 3 for domestic institutions SOSA 1 or 2 and ROCA 4 and 5 for FBO’s Adequately capitalized No supplementary information that indicates the institution is not generally sound Linkage with eligibility for daylight credit

Discount WindowPreparing to Borrow: Discount Window Preparing to Borrow Documentation Authorizing resolution (form differs for FBO’s) Letter of Agreement List of depository institution’s staff authorized to conduct borrowings (aka signature card) Opinion of foreign and U.S. legal counsel (FBO’s only)

Discount WindowPreparing to Borrow: Discount Window Preparing to Borrow Collateral Discount Window loans must be “secured to the satisfaction” of the lending Reserve Bank DI’s pledge assets (collateral) to the Reserve Bank Typical collateral U.S. Treasury and agency securities Municipal and corporate securities Loans “Prepared to borrow”

Discount WindowReluctance to Borrow: Discount Window Reluctance to Borrow Reasons “Option” value Internal reporting Regulators Negative “market” perceptions Collateral burden

Discount WindowReluctance to Borrow: Discount Window Reluctance to Borrow Frequency Guidelines Why the FRS publishes none. How much is too much? What happens when frequency exceeds internal guidelines?

Discount WindowReluctance to Borrow: Discount Window Reluctance to Borrow Backstop for Open Market Operations Shortfall in daily reserve supply relative to demand, i.e., Fed Funds Borrow freely Resell funds No “frequency” factor

Discount WindowSummary of Major Points: Discount Window Summary of Major Points DIs should consider, and use, the discount window as a contingent funding source. There are no restrictions on the use of Primary Credit funds. Recognize the variety of situations where a Primary Credit loan can give DIs flexibility … especially late in the day.

Discount WindowSummary of Major Points (Con’t): Discount Window Summary of Major Points (Con’t) Be “prepared” to borrow. Internal barriers to borrowing from the discount window might reflect misunderstanding about today’s Primary Credit program. Frequency is rarely an issue. When it is, FRBSF uses a consultative approach. Borrowing from the discount window when the Fed Funds rate exceeds the targeted rate is encouraged.

Discount WindowInformation Resources: Discount Window Information Resources Federal Reserve Bank of San Francisco – Discount Window Contacts Rick Miller, Director – 415.974.2974 – rick.miller@sf.frb.org Steve Fung, Sr. Manager – 415.974.2470 – steve.fung@sf.frb.org Javier Jerez, Manager – 415.974.2500 – javier.jerez@sf.frb.org