Lending to Depository Institutions

The following is from the Federal Reserve’s Website. See http://www.federalreserve.gov/monetarypolicy/bst.htm.

Open Market Operations

Open market operations (OMOs)--the purchase and sale of securities in the open market by a central bank--are a key tool used by the Federal Reserve in the implementation of monetary policy. Historically, the Federal Reserve has used OMOs to adjust the supply of reserve balances so as to keep the federal funds rate around the target federal funds rate established by the Federal Open Market Committee (FOMC). OMOs are conducted by the Trading Desk at the Federal Reserve Bank of New York. The range of securities that the Federal Reserve is authorized to purchase and sell is relatively limited. The authority to conduct OMOs is found in section 14 of the Federal Reserve Act.

The Federal Reserve Bank of New York publishes a detailed explanation of OMOs each year in its Annual Report.

← Annual reports

OMOs can be divided into two types: permanent and temporary. Permanent OMOs are generally used to accommodate the longer-term factors driving the expansion of the Federal Reserve's balance sheet--primarily the trend growth of currency in circulation. Permanent OMOs involve outright purchases or sales of securities for the System Open Market Account, the Federal Reserve's portfolio. Temporary OMOs are typically used to address reserve needs that are deemed to be transitory in nature. These operations are either repurchase agreements (repos) or reverse repurchase agreements (reverse repos). Under a repo, the Trading Desk buys a security under an agreement to resell that security in the future. A repo is the economic equivalent to a collateralized loan, in which the difference between the purchase and sale prices reflects interest.

The Federal Reserve Bank of New York publishes details on its website of all permanent and temporary operations.

Each OMO affects the Federal Reserve's balance sheet; the size and nature of the effect depends on the specifics of the operation. The Federal Reserve publishes its balance sheet each week in the H.4.1 statistical release, "Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Reserve Banks." The release separately reports securities held outright, repos, and reverse repos.

The Federal Reserve's approach to the implementation of monetary policy has evolved considerably since 2007, and particularly so since late 2008. The FOMC has established a near-zero target range for the federal funds rate, implying that the very large volume of reserve balances provided through the various liquidity facilities is consistent with the FOMC's funds rate objectives. In addition, open market operations have provided increasing amounts of reserve balances. Specifically, to help reduce the cost and increase the availability of credit for the purchase of houses, on November 25, 2008, the Federal Reserve announced that it would buy direct obligations of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks and mortgage-backed securities (MBS) guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. The Federal Reserve determined that supporting the mortgage-backed security dollar roll market promotes the goals of the mortgage-backed securities purchase program. Dollar roll transactions consist of a purchase of securities combined with an agreement to sell securities in the future and provide short-term financing to the mortgage-backed securities market. Because of principal and interest payments and occasional delays of settlement of transactions, the Federal Reserve also has some uninvested cash associated with the mortgage-backed securities purchase program. The Federal Reserve's outright holdings of mortgage-backed securities are reported in tables 1, 3, 9, and 10 of the H.4.1 statistical release. Table 3 provides more detail; it also reports the Federal Reserve's commitments to purchase and sell these securities, along with information related to cash and cash equivalents associated with the purchase program. As noted in that table, the commitments to purchase and sell securities are associated both with outright transactions and with dollar rolls.

The FRBNY reports each week's purchases and sales of MBS on their website, while agency debt purchases are reported with the standard reporting of permanent operations. The value of MBS held outright presented on the H.4.1 statistical release may vary from the aggregate value of MBS purchased reported on FRBNY's website. The H.4.1 statistical release reports settled MBS transactions separately from commitments to purchase and sell MBS. By contrast, FRBNY's website reports only purchase or sale transactions each week and thus does not address the issues of settlement. Moreover, the current face value of MBS reported on the H.4.1 statistical release represents the remaining principal balance of the underlying securities as of the Wednesday prior to the release. Over time, as the principal balance of the underlying securities decreases because the mortgages backing the securities are paid down or refinanced, the face value will decrease.

← Agency Mortgage-Backed Securities Purchase Program

Central Bank Liquidity Swaps

Because of the global nature of bank funding markets, the Federal Reserve coordinates with other central banks to provide liquidity. The Federal Reserve has entered into agreements to establish temporary reciprocal currency arrangements (central bank liquidity swap lines) with a number of foreign central banks. Two types of temporary swap lines have been established: dollar liquidity lines and foreign-currency liquidity lines.

The Federal Reserve operates swap lines under the authority of section 14 of the Federal Reserve Act and in compliance with authorizations, policies, and procedures established by the Federal Open Market Committee (FOMC).

Dollar Liquidity Swap Lines

On December 12, 2007, the FOMC announced that it had authorized dollar liquidity swap lines with the European Central Bank and the Swiss National Bank to provide liquidity in U.S. dollars to overseas markets. Subsequently, the FOMC authorized dollar liquidity swap lines with additional central banks. These lines are now authorized with the following institutions: the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Korea, the Banco de Mexico, the Reserve Bank of New Zealand, the Norges Bank, the Monetary Authority of Singapore, the Sveriges Riksbank, and the Swiss National Bank. The FOMC has authorized these lines through October 30, 2009.

Lending to Depository Institutions

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 Regulation A. As described in more detail below, depository institutions have, since 2003, had access to three types of discount window credit--primary credit, secondary credit, and seasonal credit. In December of 2007, the Federal Reserve introduced the Term Auction Facility (TAF), which provides credit to depository institutions through an auction mechanism. 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 collateral; in other words, the value of the collateral must exceed the value of the loan. Information on collateral policies and interest rates charged for lending are discussed in the collateral and rate setting and risk management sections of this website.

Primary Credit Primary credit is a lending program available to depository institutions that are in generally sound financial condition. Because primary credit is available only to depository institutions in generally sound financial condition, it is generally provided with minimal administrative requirements; for example, there are essentially no usage restrictions on primary credit. Before the current financial crisis, primary credit was available on a very short-term basis, typically overnight, at a rate 100 basis points above the Federal Open Market Committee's (FOMC) target rate for federal funds. The primary credit facility helps provides an alternative source of funding if the market rate exceeds the primary credit rate, thereby limiting trading at rates significantly above the target rate.

The Federal Reserve has implemented a number of important changes to the primary credit program since the financial crisis emerged. On August 17, 2007, to promote orderly market functioning, the Federal Reserve reduced the spread between the primary credit rate and the 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, to bolster market liquidity, the Federal Reserve further reduced the spread of the primary credit rate over the target federal funds rate to 25 basis points and increased the maximum maturity of primary credit loans to 90 days. In extending primary credit, Reserve Banks must judge that the borrower is likely to remain eligible for primary credit for the term of the loan. Detailed information is available on the Discount Window website.

Primary credit outstanding is reported in table 1 of the H.4.1 statistical release. In addition, primary credit is included in “Other loans” in tables 9 and 10 of that release.

← Primary credit

Secondary Credit Secondary credit is available to depository institutions that are not eligible for primary credit. It is extended on a very short-term basis, typically overnight, at a rate 50 basis points above the primary credit rate. In contrast to primary credit, there are restrictions on the uses of secondary credit extensions. Secondary credit is available to meet backup liquidity needs when its use is consistent with a timely return by the borrower to a reliance on market sources of funding or the orderly resolution of a troubled institution. Secondary credit may not be used to fund an expansion of the borrower's assets. Moreover, the secondary credit program entails a higher level of Reserve Bank administration and oversight than the primary credit program. Reserve Banks typically apply higher haircuts on collateral pledged to secure secondary credit. In addition, the liquidity position of secondary credit borrowers is monitored closely, and the Federal Reserve typically is in close contact with the borrower's primary federal regulator. Detailed information is available on the Discount Window website.

Secondary credit outstanding is reported in table 1 of the H.4.1 statistical release. In addition, secondary credit is included in “Other loans” in tables 9 and 10 of that release.

← Secondary credit Seasonal Credit The Federal Reserve's seasonal credit program assists small depository institutions in managing significant seasonal swings in their loans and deposits. Eligible depository institutions may borrow term funds from the discount window during their periods of seasonal need, enabling them to carry fewer liquid assets during the rest of the year and, thus, allow them to make more funds available for local lending. The interest rate applied to seasonal credit is a floating rate based on market rates.

Seasonal credit is available only to depository institutions that can demonstrate a clear pattern of recurring intra-yearly swings in funding needs. Eligible institutions are usually located in agricultural or tourist areas. To become eligible for seasonal credit, an institution must establish a seasonal qualification with its Reserve Bank. Detailed information is available on the Discount Window website.

Seasonal credit outstanding is reported in table 1 of the H.4.1 statistical release. In addition, seasonal credit is included in “Other loans” in tables 9 and 10 of that release.

← Seasonal Credit Program

Term Auction Facility On December 12, 2007, in view of pronounced strains in term bank funding markets, the Federal Reserve announced the creation of the TAF. Under the TAF program, the Federal Reserve auctions term funds to depository institutions. All depository institutions that are eligible to borrow under the primary credit discount window program are eligible to participate in TAF auctions. All advances must be fully collateralized with an appropriate haircut.

The TAF program currently makes available term funds of 28-day or 84-day maturity of up to $150 billion per auction to depository institutions, at an interest rate that is determined by the auction. Detailed information is available on the Board's website.

Term auction credit outstanding is reported in tables 1, 9, and 10 of the H.4.1 statistical release.

← Term Auction Facility

Lending to Primary Dealers

Primary Dealer Credit Facility On March 16, 2008, the Federal Reserve announced the creation of the Primary Dealer Credit Facility (PDCF). The PDCF is an overnight loan facility that provides funding to primary dealers and helps foster improved conditions in financial markets more generally. Operational details of the facility are explained on the website of the Federal Reserve Bank of New York.

← Primary Dealer Credit Facility

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. Information on collateral policies and interest rates charged for lending are discussed in the collateral and rate setting and risk management sections of this website. On September 21, 2008, the Federal Reserve Board authorized the extension of credit to a set of other securities dealers on very similar terms 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.

Securities Lending The Federal Reserve Bank of New York operates a securities lending program to provide a temporary source of Treasury securities to promote the smooth clearing of the Treasury securities market. Securities loans are awarded to primary dealers based on a competitive auction for overnight loans against other Treasury securities as collateral. A description of the program is presented on the website of the Federal Reserve Bank of New York, as are the terms of the program and the securities lending operations that are conducted. Securities lent on an overnight basis through this facility are presented in table 1A of the H.4.1 statistical release.

Term Securities Lending Facility On March 11, 2008, the Federal Reserve announced the creation of the Term Securities Lending Facility (TSLF) under the authority of section 13(3) of the Federal Reserve Act. The TSLF loans Treasury securities to primary dealers for one month against eligible collateral. For so-called "Schedule 1" auctions, the eligible collateral comprises Treasury securities, agency securities, and agency mortgage-backed securities. For "Schedule 2" auctions, the eligible collateral includes schedule 1 collateral plus highly rated private securities. The program supports the liquidity of primary dealers and fosters improved conditions in financial markets more generally. Information on collateral policies and interest rates charged for lending are discussed in the collateral and rate setting and risk management sections of this website. Operational details of the TSLF are published on the Federal Reserve Bank of New York website. Securities lent through the TSLF are reported in table 1A of the H.4.1 statistical release.

← Term Securities Lending Facility Term Securities Lending Options Program The Term Securities Lending Facility Options Program (TOP) offers an option to primary dealers to draw upon short-term, fixed rate TSLF loans from the System Open Market Account portfolio in exchange for eligible collateral. The options are awarded through a competitive auction. The program is intended to enhance the effectiveness of the TSLF by offering additional liquidity during periods of heightened collateral market pressures, such as around quarter-end dates. A description of the program is published on the Federal Reserve Bank of New York website. When options under this program are outstanding, they are presented in a footnote to table 1A in the H.4.1 statistical release.

← Term Securities Lending Facility Options Program (TOP)

Support for Specific Institutions

Bear Stearns To facilitate the acquisition of the Bear Stearns Companies, Inc. by JPMorgan Chase & Co., the Federal Reserve Bank of New York (FRBNY) created and extended credit to Maiden Lane LLC. Maiden Lane LLC is a limited liability company (LLC) formed to acquire certain assets of Bear Stearns and to manage those assets through time to maximize the repayment of credit extended to the LLC and to minimize disruption to financial markets. The terms of the loan to Maiden Lane LLC were disclosed on the FRBNY website.

← Summary of Terms and Conditions Regarding the JPMorgan Chase Facility

Because the FRBNY is the primary beneficiary of the LLC, the assets and liabilities of the LLC are consolidated onto the balance sheet of the FRBNY. As a result, the assets of the LLC are presented in tables 1, 9, and 10 of the H.4.1 statistical release. Extra detail on the accounts of Maiden Lane LLC is presented in table 4 of the H.4.1 statistical release. The first line in table 4 presents the "fair value" of the portfolio of assets held by the LLC. Fair value is an estimate of the price that would be received upon selling an asset if the transaction were to be conducted in an orderly market. The next two lines of table 4 present the principal and interest owed to the FRBNY by the LLC. American International Group On September 16, 2008, the Federal Reserve announced that it would lend to American International Group, Inc., (AIG) to provide AIG with the time and flexibility to execute a value-maximizing strategic plan. Initially, the FRBNY extended an $85 billion line of credit to the company. On October 8, 2008, the FRBNY was authorized to extend credit to certain AIG subsidiaries against a range of securities. The terms of the loan were disclosed on this website. The credit extended to AIG under both of these programs is presented in table 1 of the H.4.1 and included in "Other loans" loans in tables 9 and 10.

← Statement by the Federal Reserve Bank of New York Regarding AIG Transaction ← Press release, September 16, 2008

On November 10, 2008, the Federal Reserve and the Treasury announced a restructuring of the government's financial support to AIG. As part of this restructuring, two new LLCs were created. On December 12, 2008, FRBNY began extending credit to Maiden Lane II LLC, a company formed to purchase residential mortgage-backed security (RMBS) assets from AIG subsidiaries. Details of the terms of the loan were published on the FRBNY website.

← AIG RMBS LLC Facility: Terms and Conditions

Because this LLC is consolidated onto the balance sheet of the FRBNY, the loan from the FRBNY to the LLC is not on the balance sheet. To provide details about the loan and other information about the LLC, table 5 in the H.4.1 statistical release provides detail on the principal accounts of Maiden Lane II.

On November 25, 2008, the FRBNY began extending credit to Maiden Lane III LLC, a company formed to purchase multi-sector collateralized debt obligations (CDOs) on which the Financial Products group of AIG had written credit default swap and similar contracts. Details of the terms of the loan were published on the FRBNY website. Because this LLC is consolidated onto the balance sheet of the FRBNY, the loan from the FRBNY to the LLC is not on the balance sheet. To provide details about the loan and other information, table 6 in the H.4.1 statistical release provides detail on the principal accounts of Maiden Lane III.

← AIG CDO LLC Facility: Terms and Conditions

On March 2, 2009, the Federal Reserve and the Treasury announced a restructuring of the government's assistance to AIG. Specifically, the government's restructuring was designed to enhance the company's capital and liquidity in order to facilitate the orderly completion of the company's global divestiture program.

← Press release, March 2, 2009

Citigroup On November 23, 2008, the Treasury, the Federal Reserve, and the FDIC jointly announced that the U.S. government would provide support to Citigroup to contribute to financial market stability. The terms of the arrangement are disclosed on this website. Because the Federal Reserve has not extended credit to Citigroup under this arrangement, the commitment is not reflected in the H.4.1 statistical release.

← Joint Statement by Treasury, Federal Reserve, and the FDIC on Citigroup November 23, 2008 ← Term sheet (42 KB PDF)

Bank of America On January 16, 2009, the Treasury, the Federal Reserve, and the FDIC jointly announced that the U.S. government would provide support to Bank of America to support financial market stability. The terms of the support were disclosed on this website. Because the Federal Reserve has not extended credit to Bank of America under this arrangement, the commitment is not reflected in the H.4.1 statistical release.

← Joint Statement by Treasury, Federal Reserve, and the FDIC on Bank of America, January 16, 2009 ← Term sheet (77 KB PDF)

Other Lending Facilities

Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) is a lending facility that finances the purchases of high-quality asset-backed commercial paper (ABCP) from money market mutual funds 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. Collateral policies for the AMLF are discussed in the collateral and rate setting and risk management sections of this website. The loans extended through the AMLF are non-recourse loans, meaning that the borrower's obligation to repay the loan can be fulfilled by surrendering the collateral. The terms and conditions of the facility and other information are presented on this website.

← Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility

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 twelve 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. The Federal Reserve Board has authorized extension of credit through the AMLF until October 30, 2009.

Commercial Paper Funding Facility The Commercial Paper Funding Facility (CPFF) is a facility, authorized under section 13(3) of the Federal Reserve Act, that enhances 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), the CPFF LLC. This LLC purchases three-month unsecured and asset- backed commercial paper directly from eligible issuers. The Federal Reserve provides financing to the LLC through the CPFF. The Federal Reserve's lending to the LLC is secured by all of the assets of the LLC and by the retention of up- front fees paid by the issuers. Collateral policies for the CPFF are discussed in the collateral and rate setting and risk management sections of this site.

The CPFF was announced on October 7, 2008. It is administered by the Federal Reserve Bank of New York (FRBNY). Because the FRBNY is the sole beneficiary of the CPFF LLC, 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. The Federal Reserve Board has authorized the extension of credit from the CPFF through October 30, 2009. Detailed information on the CPFF is provided on this website.

← Commercial Paper Funding Facility

Money Market Investor Funding Facility The Money Market Investor Funding Facility (MMIFF), announced on October 21, 2008 and authorized under section 13(3) of the Federal Reserve Act, is intended to provide liquidity to U.S. money market mutual funds and certain other money market investors, thereby increasing their ability to meet redemption requests and hence their willingness to invest in money market instruments, particularly term money market instruments. Under the MMIFF, the FRBNY can provide senior secured funding to a series of LLCs that were established with the private sector. The FRBNY finances the purchase of eligible assets from eligible investors by these LLCs. Eligible assets include U.S. dollar-denominated certificates of deposit and commercial paper that are issued by highly rated financial institutions and have remaining maturities of 90 days or less. Collateral policies for the MMIFF are discussed in the collateral and rate setting and risk management sections of this website. Initially, only U.S. money market mutual funds were eligible investors. Since January 7, 2009, the Federal Reserve made a number of other money market investors eligible participants, including U.S.- based securities-lending cash-collateral reinvestment funds, portfolios, and accounts (securities lenders); and U.S.-based investment funds that operate in a manner similar to money market mutual funds, such as certain local government investment pools, common trust funds, and collective investment funds.

The FRBNY is the primary beneficiary of the LLCs funded through the MMIFF and, as a result, consistent with generally accepted accounting principles, the assets and liabilities of the LLC are consolidated onto the books of the FRBNY. The net portfolio holdings of the LLC are presented in tables 1, 9, and 10 of the Federal Reserve Board's H.4.1 statistical release, and principal accounts of the LLC are presented in table 8. To date, there has been no borrowing under the MMIFF. The Federal Reserve Board has authorized the extension of credit from the MMIFF through October 30, 2009. Detailed information on the MMIFF is provided on the Federal Reserve Board's public website.

← Money Market Investor Funding Facility

Term Asset-Backed Securities Loan Facility On November 25, 2008, the Federal Reserve announced the creation of the Term Asset-Backed Securities Loan Facility (TALF) under section 13(3) of the Federal Reserve Act. The TALF is a funding facility that issues loans with a term of up to three years to holders of eligible asset-backed securities (ABS). The TALF is intended to assist the 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 and to improve the market conditions for ABS more generally. Operational details of the facility and other information are presented on this site.

← Term Asset-Backed Securities Loan Facility

Eligible collateral includes U.S. dollar-denominated cash ABS that are backed by student loans, auto loans, credit card loans, loans or leases relating to business equipment, leases of vehicle fleets, floor plan loans, mortgage servicing advances, and loans guaranteed by the Small Business Administration (SBA) and that have a credit rating in the highest investment-grade rating category from two or more nationally recognized statistical rating agencies and do not have a credit rating below the highest investment grade rating category from a major rating agency. Collateral policies for the TALF are discussed in more detail in the collateral and rate setting and risk management sections of this website. The loans provided through the TALF are non-recourse loans, meaning that the borrower's obligation to repay the loan can be fulfilled by surrendering the collateral. The U.S. Treasury is providing credit protection to the FRBNY using funds authorized under the Troubled Assets Relief Program (TARP). The loan from the FRBNY is senior to the TARP funds.

On February 10, 2009, the Federal Reserve Board announced that it is prepared to expand the size of the TALF to as much as $1 trillion and potentially to 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 23, the Federal Reserve and the Treasury announced that they were planning on expanding the list of eligible collateral for TALF loans to include older securities in conjunction with the Treasury's Public Private Partnership Investment Program. Eligible securities are expected to include certain non- agency RMBS that were originally rated AAA and outstanding commercial mortgage-backed securities and ABS that are rated AAA.