Extensions of Credit by Federal Reserve Banks

FEDERAL RESERVE SYSTEM

12 CFR Part 201

[Regulation A; Docket R-1038]

Extensions of Credit by Federal Reserve Banks

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Board is amending its Regulation A to establish a special

lending program under which Federal Reserve Banks will extend credit at

a rate 150 basis points above the Federal Open Market Committee's

targeted federal funds rate to eligible institutions to accommodate

liquidity needs during the century date change period. Unlike

adjustment credit, borrowers will not be required to seek credit

elsewhere first, uses of funds will not be limited, and the loans may

be outstanding for any period while the facility is open.

EFFECTIVE DATE: October 1, 1999.

FOR FURTHER INFORMATION CONTACT: James A. Clouse, Chief, Monetary and

Financial Market Analysis Section (202) 452-3922, or William R. Nelson,

Economist (202) 452-3579, Division of Monetary Affairs; Oliver I.

Ireland, Associate General Counsel (202) 452-3625, or Stephanie Martin,

Managing Senior Counsel (202) 452-3198, Legal Division. For users of

the Telecommunications Device for the Deaf (TDD), contact Diane Jenkins

(202) 452-3544, Board of Governors of the Federal Reserve System, 20th

and C Streets, N.W., Washington, D.C. 20551.

SUPPLEMENTARY INFORMATION: The Board is amending its Regulation A (12

CFR part 201), Extensions of Credit by Federal Reserve Banks, to

provide an additional mechanism under which Federal Reserve Banks will

make discount window credit available to depository institutions in the

months surrounding the century date change. The Board expects that,

with advance planning, depository institutions will be able to meet

their liquidity needs during the century date change period relying on

their usual sources of funds, including adjustment credit at the

discount window. The Board recognizes, however, that uncertainty

surrounds potential developments over the period. The Special Liquidity

Facility is intended to ensure that a source of funds is available to

relieve unusual liquidity pressures that depository institutions may

experience.

Background

Depository institutions and their customers are now making plans to

meet possible credit needs in the period around the century date

change. Their planning is complicated by uncertainty about the cost and

availability of funds to individual depository institutions in the

period surrounding the rollover. Unusual liquidity strains might arise

from the conversion of deposits to currency, heightened credit demands,

greater lender and depositor caution, and potential market disruptions.

While some banks may experience a surge in deposits as investors pull

back from institutions and markets perceived as more vulnerable, the

degree and incidence of shifts in liquidity demands and supplies are

extremely difficult to predict. They could well involve pressures on

small and medium-sized depository institutions that customarily are

suppliers of funds to larger institutions and markets. These smaller

institutions might have difficulty obtaining relatively large volumes

of funds because they typically do not have access to national funding

markets and have limited borrowing relationships with other banks.

To a considerable extent, greater aggregate liquidity needs in

reserve markets can be met using open market operations, as they are,

for example, in November and December of each year when there is a

large seasonal increase in demand for currency. Forecasts of reserve

market pressures, however, will be subject to considerable uncertainty,

and the normal distribution of reserves and liquidity through markets

may be disrupted by the unusual funding situations of institutions and

uncertainty about the status of potential borrowers. Volatility in the

demand for reserves is likely to be compounded by a decline in required

reserves as customers replace transaction accounts with currency and by

a drop in required reserve balances at the Federal Reserve as banks

augment their holdings of vault cash to meet potential customer

demands. Consequently, undesirable tightness and distortions in short-

term funding markets would be a possibility if reliance were to be

placed almost entirely on open market operations to meet liquidity

needs.

Supervisors have urged depository institutions to make firm

contingency plans for meeting unexpected liquidity demands and have

encouraged them to make the Federal Reserve's discount window part of

those plans. Although borrowing by depository institutions through the

usual adjustment credit facility of the discount window should be

adequate to meet most unusual needs and relieve possible pressures on

credit markets, in practice depository institutions have been somewhat

reluctant in the past to use such credit. Moreover, the adjustment

credit program requires borrowers to seek funds elsewhere first,

constrains the uses of the funds, and is normally very limited in

duration.

Special Liquidity Facility

In May 1999, the Board requested comment on amendments to its

Regulation A (12 CFR part 201) to implement a Special Liquidity

Facility that would make collateralized Federal Reserve Bank credit

more freely available, albeit at an interest rate somewhat above

depository institutions' normal cost of funds (64 FR 28768, May 27,

1999). By assuring the availability of Reserve Bank credit, the

facility should enable depository institutions and their customers to

commit to meeting possible credit needs with greater confidence. The

facility should also help to damp any tendency for money markets to

tighten owing to transitory imbalances in the supply and demand of

reserves.

The Board received 93 comments on its proposal, distributed as

follows:

------------------------------------------------------------------------

Type of institution Number

------------------------------------------------------------------------

Commercial Bank................................................ 63

Trade Association.............................................. 9

Savings Bank................................................... 7

Credit Union................................................... 5

[[Page 41766]]

Federal Reserve Bank........................................... 2

Investment Bank................................................ 2

Government Agency.............................................. 2

Government Sponsored Agency.................................... 1

Clearing House................................................. 1

Consultant..................................................... 1

--------

Total...................................................... 93

------------------------------------------------------------------------

Virtually all of the commenters supported the creation of the Special

Liquidity Facility. The commenters frequently noted that even though

the financial services industry was well prepared for Year 2000, the

facility would provide a desirable degree of certainty that funds would

be available to meet liquidity demands around year-end. Only three

commenters opposed the facility, all of them stating that existing

discount lending programs would be sufficient to meet year-end funding

contingencies.

After considering the comments, which are discussed in detail

below, the Board has adopted the proposed amendments to Regulation A

implementing the Special Liquidity Facility with revisions. The Board

has adopted the proposed rate for the facility of 150 basis points over

the Federal Open Market Committee's targeted federal funds rate. The

Board also moved up the opening date for the facility to October 1,

1999, from the proposed opening date of November 1, 1999. The closing

date will be April 7, 2000, or such later date as determined by the

Board. Finally, the Board has revised the definition of ``eligible

institution'' to mean an institution that is in sound financial

condition in the judgment of the lending Reserve Bank. Such a judgment

may be based on more than simply whether a borrower meets certain

capital standards on a particular date.

Rate

The Board proposed that credit under the Special Liquidity Facility

be available at a spread over the Federal Open Market Committee's

target federal funds rate. The Board tentatively proposed that the

spread be set at 150 basis points, but specifically requested comment

on whether the size of the proposed spread was appropriate.

Nearly 20 percent of the commenters endorsed the facility without

commenting on the proposed lending rate, and another 10 percent

specifically stated that a 150 basis point spread was appropriate.

About 70 percent, however, suggested that the lending rate be set at a

lower spread. Of these, nearly 20 percent stated they preferred a

spread of 50 basis points, while the remainder were divided about

evenly between those requesting less than 50 basis points, 75 basis

points, 100 basis points, or simply stating the spread should be below

150 basis points. The commenters offered a variety of reasons why a

lower spread would be desirable. Several stated that a rate of 150

basis points over the target federal funds rate is so far above their

typical cost of funds that use of the facility would seriously reduce

their profits, placing an undue burden on their institutions. Others

stated that the proposed spread would discourage use of the facility

until liquidity problems had become acute, noting that a lower spread

would be sufficient to promote private-sector arrangements. Many

institutions expressed concern that the proposed spread would become

the standard for the pricing of year-end lines of credit. A few banks

observed that institutions would not borrow at the proposed spread for

fear that it would be taken as a sign of distress.

The lending rate should be high enough to encourage institutions to

continue to make private-sector arrangements to meet potential funding

needs, but low enough to provide a reasonable backstop should, contrary

to the Board's expectations, concerns about the century date change, or

the change itself, begin to put strains on funding and credit markets.

It is difficult to determine precisely what spread fits these criteria

in part because loans under the facility could be used for a variety of

purposes and may be extended to a disparate set of depository

institutions. A relatively narrow spread still may be high enough to

offer incentives to large financial institutions of unquestioned credit

quality with access to money and capital markets to seek private-sector

alternatives to the facility, but a wider spread may be required for

other institutions that are smaller or for whom markets perceive a

significant credit risk.

A related difficulty in selecting a spread is that there are no

close analogues to the facility against which to compare the pricing.

Unlike most private or government agency alternatives, the Special

Liquidity Facility requires no fee to establish and may be drawn on and

repaid at any time over the life of the facility without penalty. The

Federal Home Loan Banks (FHLBs) have been offering their members Year-

2000 funding alternatives, but these typically involve restrictions,

fees, or other costs not present in the Special Liquidity Facility. The

implicit prices of FHLB alternatives range from above that proposed for

the facility to somewhat below, depending on the length of time over

which the fees are prorated. Informal discussions with commercial banks

suggest secured lines of credit to high-quality, large banks would be

priced at only a few basis points over LIBOR,1 but the

spread on a similar line to small banks would be over 100 basis points

(LIBOR is now about 25 basis points above the federal funds rate).

Other central banks have arrangements through which they lend reserves

overnight at a penalty rate. The spreads on these facilities range from

25 basis points in Canada to 200 basis points in Switzerland; several

central banks, including the European Central Bank, charge 100 basis

points.

---------------------------------------------------------------------------

\1\ The London Interbank Offered Rate (LIBOR) is a standard rate

of interest used in international transactions.

---------------------------------------------------------------------------

On balance, the Board believes that a spread of less than 150 basis

points might not be sufficient to assure that many depository

institutions still would have incentives to make private-sector

arrangements to meet potential shifts in the supplies of, and demands

for, liquidity. Furthermore, a spread of 150 basis points probably is

low enough to provide a reasonable backstop if concerns about the

century date change or disruptions associated with the change itself

begin to put strains on funding and credit markets, especially if these

strains are short-lived. The federal funds rate has reached highs in

excess of 150 basis points above the target rate on more than one-third

of the final days of reserve maintenance periods since the beginning of

1994. A spread of 150 basis points is also well within the range of

year-end premiums observed in the commercial paper market in past

years.

Period of Operation

The Board proposed that credit under the Special Liquidity Facility

be available from November 1, 1999, to April 7, 2000. The Board

requested comment on how long the facility should be open, in

particular whether it should begin earlier.

A majority of commenters either expressed general approval of the

facility as described or specifically endorsed the start and stop

dates. However, a significant minority (25 percent) suggested an

earlier start date, and a few commenters suggested either a later

ending date or flexibility on the stop date depending on circumstances.

Among those suggesting an earlier start date, most proposed the

beginning of October, although a few requested September, August, or as

soon as possible. A majority of those advising an earlier opening cited

plans to build up

[[Page 41767]]

vault cash earlier in the fall. More broadly, other commenters stated

that an earlier start date would be a prudent response to the great

uncertainty about demands for liquidity in the fourth quarter,

including the potential for cash withdrawals.

In light of these comments, the Board has determined to make the

facility available beginning October 1, 1999. The facility is meant to

provide assurance to financial institutions that funds will be

available if unforeseen difficulties arise. Given the expressed view

that such assurance would be desirable earlier than proposed, there

appears to be little reason not to open the facility sooner. The Board

has retained the closing date of April 7, 2000, but has specified in

the regulation that at a later time it could move back the closing date

if conditions warrant.

Eligible Borrowers

The Board proposed that credit under the Special Liquidity Facility

would remain discretionary, even though many normal discount window

conditions would not apply. The Board proposed that the Special

Liquidity Facility would be available only to depository institutions

in sound financial condition. For example, under the proposal, it would

not have been available to depository institutions that are

undercapitalized or critically undercapitalized under the standards set

forth in the prompt corrective action provisions of the Federal Deposit

Insurance Act 2 and implementing regulations. Reserve Bank

discounts for and advances to such institutions are limited by

Sec. 201.4 of Regulation A. That section implements amendments to

section 10B of the Federal Reserve Act 3 that discourage the

Reserve Banks from making relatively long-term loans to inadequately

capitalized institutions. Similarly, in the case of credit unions, the

Board proposed that credit under the Special Liquidity Facility would

be available only to institutions with a net worth ratio (as defined in

section 216 of the Federal Credit Union Act 4) of at least

six percent, which qualifies a credit union as adequately capitalized

under that Act.5 With respect to branches and agencies of

foreign banks, the Board proposed that credit under the Special

Liquidity Facility would be available only to a branch or agency where

the borrowing bank meets the equivalent of the Basle Capital Accord's

minimum standards for capital and is otherwise considered to be in

sound financial condition.

---------------------------------------------------------------------------

\2\ 12 U.S.C. 1831o(b)(1)(E).

\3\ 12 U.S.C. 347b(b).

\4\ 12 U.S.C. 1790d(o)(3).

\5\ Section 216 of the Federal Credit Union Act will take effect

on August 7, 2000, except for special provisions regarding risk-

based net worth requirements, which take effect on January 1, 2001.

The National Credit Union Administration has initiated rule-making

procedures to adopt rules to implement the Act, but no final rules

are yet in place. See 64 FR 27090, May 18, 1999.

---------------------------------------------------------------------------

Several commenters stated that there may be situations where it

would be appropriate to provide access to the Special Liquidity

Facility for undercapitalized institutions. Four commenters stated that

the Board should permit institutions some liquidity and capital ratio

flexibility during the century date change period, particularly in

light of the possibility that market behavior during the conversion,

such as a ``flight to quality'' inflow of bank deposits or the drawing

down of lines of credit, could create temporary balance sheet

distortions. One commenter stated that denying access to these

institutions could cause a public reaction that would increase the

institution's vulnerability and precipitate customer withdrawals.

Another commenter suggested that, rather than prohibit undercapitalized

institutions from using the facility, the Board could place more

limited controls on undercapitalized institutions that balance the need

to provide emergency funding with measures to prevent the inappropriate

use of those funds, such as restrictions on the purpose and duration of

borrowing and enhanced supervision. Finally, one commenter stated that

the eligibility of U.S. branches and agencies of foreign banks for the

Special Liquidity Facility should be determined by a combination of

supervisory ratings and investment information such as independent

agency ratings.

The credit union industry raised specific concerns. Two commenters

stated that the proposed 6 percent net worth ratio that must be met by

eligible credit unions is unworkable for corporate credit unions, which

are not subject to statutory net worth requirements. One commenter

suggested that the Board leave the determination as to the eligibility

of corporate credit unions to the Reserve Bank or, alternatively, deem

a corporate credit union to be eligible if it meets an appropriate

capital ratio as determined by its primary regulator.6 The

other commenter suggested that the Board simply deem corporate credit

unions to be eligible borrowers. One commenter requested that the Board

lower the net worth requirement for eligible credit unions to 5.5

percent because of the likelihood that expenses associated with

century-date-change preparations may require some credit unions to

reduce their capital. Another commenter suggested that an alternative

to lowering the net worth percentage would be to average the credit

union's capitalization over several reporting periods to determine

eligibility. Another commenter objected to the Board using a statutory

net worth requirement for credit unions that has not yet taken effect

and suggested that the Board establish a definition of ``sound

financial institution'' that would be flexible and take into account a

variety of factors other than capital, such as risk and collateral.

Another commenter suggested that any credit union with reasonable net

worth and adequate collateral should be eligible.

---------------------------------------------------------------------------

\6\ Generally, corporate credit unions are not eligible to

borrow from the discount window unless they hold reserves.

---------------------------------------------------------------------------

An important purpose of the Special Liquidity Facility is to

encourage depository institutions to extend lines of credit over year-

end. The Board has determined, therefore, that its proposed definition

of ``eligible institution,'' which tied eligibility to capital

standards established under the prompt corrective action regimes for

depository institutions, could be unduly constraining. Potentially,

depository institutions that do not meet the minimum requirements to be

adequately capitalized before or due to their borrowing from the

Special Liquidity Facility may still be deemed in sound financial

condition by the lending Reserve Bank. In addition, the proposed

capital standards may not be applicable to certain institutions, such

as corporate credit unions. To provide flexibility to the Reserve Banks

in administering the Special Liquidity Facility, in the final rule the

Board has deleted the proposed capital standards from the definition of

``eligible institution.'' The Special Liquidity Facility will be

available to depository institutions, including credit unions, that the

lending Reserve Bank deems to be in sound financial condition. The

borrowing limitations in Sec. 201.4(a) for institutions that are less

than adequately capitalized will continue to apply.

The Board has made a corresponding change in Sec. 201.7, which

applies the Regulation A lending provisions to branches and agencies of

foreign banks. As in the case of domestic banks, the minimum capital

levels that would be required for branches and agencies of foreign

banks under the Basle Capital Accord, while useful guides, may be

unduly constraining. There may be cases when an institution is in sound

financial condition even though it does not meet these minimum

guidelines.

[[Page 41768]]

Conversely, for both domestic and foreign institutions, even where the

institution meets minimum capital requirements, the lending Reserve

Bank may determine that the institution is not in sound financial

condition and therefore is ineligible to borrow under the Special

Liquidity Facility.

When determining whether an institution is in sound financial

condition, the Board or Reserve Bank may discuss the institution's

financial condition or other matters related to the loan with its U.S.

supervisor or, in the case of a foreign bank, its home country

supervisor or central bank. Institutions that had been adequately

capitalized and in sound financial condition but whose capital ratios

fell below minimum regulatory standards would be expected to consult

with their lending Reserve Bank. In judging whether such a borrower

remained in sound financial condition and should continue to have

access to the facility, the Reserve Bank would take into account

whether the decline owed to temporary balance sheet distortions

associated with the century date change, as well as the financial

condition of the institution before those distortions occurred.

Collateral.

The Board proposed that the collateral requirements for Special

Liquidity Facility credit would be identical to those for other

discount window loans, all of which must be fully collateralized to the

satisfaction of the Reserve Bank. Several commenters stated that the

Board should expand the types of collateral that are eligible to be

pledged for a loan under the facility. Commenters stated that they

would like to pledge collateral held at the pledgor bank, eligible

securities maintained at Euroclear, bank debentures and certificates of

deposit (with a generic hair-cut of 15 percent), GNMA and municipal

securities, corporate securities, and shares of mutual funds that

invest in allowable fixed-income securities (which are commonly held by

credit unions). One international bank commenter requested that it be

able to use collateral it maintains in the United Kingdom, possibly by

pledging it through the Bank of England, which would hold it on account

for the Reserve Bank. Two commenters suggested that the Board

informally encourage Reserve Banks to be flexible, expeditious, and

practical in their consideration of additional asset classes, hair-cuts

applied in the valuation of collateral, and methods of perfection. One

commenter stated that the collateral procedural requirements should not

be as cumbersome as those for other discount window credit. Another

commenter asked for clarification as to whether collateral will be

fungible for purposes of borrowing under existing discount window

arrangements and the Special Liquidity Facility.

The collateral requirements for Special Liquidity Facility credit

will be identical to those for other discount window loans. Reserve

Banks accept a wide range of loans and securities as collateral, but

unless the collateral is traded in active markets, such as a Treasury

or Agency security, Reserve Banks must have time to determine the

lendable value. Borrowing institutions must have pre-positioned

collateral (as well as have the necessary authorizations signed) to

have access to credit the day it is requested. If many institutions

that have not made collateral arrangements ahead of time request credit

simultaneously, the resulting congestion could prevent institutions

from obtaining credit on the day they request it. Federal Reserve staff

strive to accommodate the needs of depository institutions seeking

access to discount window credit. Staff will work aggressively to

expand the range of acceptable collateral and to make collateral

procedures more expeditious and flexible. In addition, as there will be

no separate borrowing agreements, those institutions that arrange, or

have already arranged, access to adjustment credit will have access to

Special Liquidity Facility credit, provided they are eligible

institutions. Similarly, pre-positioned collateral will be available to

secure either type of credit.

One commenter asked for clarification on additional operational

issues regarding collateral, such as what the minimum notification

period would be for using the facility on a collateral-by-collateral-

type basis, whether borrowers will be able to substitute collateral,

and what the acceptable delivery mechanism would be (delivery-versus-

payment, tri-party, or held-in-custody). Another commenter requested

that the Reserve Banks and the appropriate FHLBs coordinate on the

terms of collateral agreements to enable FHLB members to determine

their available collateral in the most efficient manner. Institutions

with questions about specific collateral arrangements should contact

their local Federal Reserve Bank.

One commenter stated that many banks have already pledged many of

their assets to secure public deposits or to the FHLBs, leaving little

available to pledge to the Reserve Banks. This commenter suggested that

the Reserve Banks could waive collateral requirements for well-

capitalized institutions without meaningfully increasing their credit

risk. Consistent with the Federal Reserve Act and historical practice,

the Reserve Banks will continue to require that all loans be

collateralized fully, even though the Board recognizes that some

borrowers present less credit risk than others.

Differences from Adjustment Credit.

Special Liquidity Facility credit, as proposed and as adopted,

would differ from adjustment credit in several ways meant to provide

greater flexibility and increase institutions' willingness to borrow.

Borrowers will not be required to exhaust alternative liquidity

sources, nor will the use of the funds be limited in the same way as

funds from adjustment credit. Furthermore, there will be no requirement

that credit be repaid expeditiously; credit can remain outstanding

until the program expires. Reserve Banks will not monitor or require

additional reports of borrowers under the Special Liquidity Facility.

Supervisory authorities may need to assess the condition of the

borrowing institution if the use of Special Liquidity Facility credit

is accompanied by signs of financial trouble.

One commenter noted that Sec. 201.6(d) of Regulation A prohibits an

institution from acting (without permission) as a medium or agent of

another institution in receiving Federal Reserve credit. The commenter

asked that the Board clarify that Sec. 201.6(d) does not preclude

eligibility for a bank that is a net provider of funds to other

institutions or needs to use the Special Liquidity Facility because of

an unexpected drawdown on a line of credit provided to another

institution. As the purpose of the Special Liquidity Facility is to

supply additional liquidity to the markets, this restriction on the use

of the funds should not apply. The Board has revised Sec. 201.6(d) to

clarify that it does not apply to depository institutions that receive

credit under the Special Liquidity Facility.

Four commenters requested clarification as to whether an

institution may make drawings from the Special Liquidity Facility at

any time during the proposed period and whether the term of a borrowing

must be stated upon drawing or whether the drawing may be made on an

open basis. One of these commenters noted that section 10B of the

Federal Reserve Act limits maturities on advances to four months,

unless the advances are secured by mortgage loans covering one-to-four

family residences. One commenter asked how often the facility could be

accessed and whether there were any

[[Page 41769]]

minimum or maximum borrowing amounts. Another commenter asked the Board

to clarify that advances under the facility may be prepaid without

penalty.

Borrowers will be able to adjust the amount they borrow as

frequently as they desire, although all outstanding credit must be

fully collateralized. Loans can be taken down and repaid at the

borrowers' discretion at any time while the facility is operating,

consequently there can be no penalty for early repayment. Technically,

all discount window loans are payable on demand, and accordingly their

maturities do not exceed four months.7

---------------------------------------------------------------------------

\7\ See the Board's interpretation on eligibility of demand

paper for discount and as security for advances by Reserve Banks, 12

CFR 201.107.

---------------------------------------------------------------------------

One commenter stated that the Board should better define the

circumstances for determining when an institution may borrow through

the Special Liquidity Facility and when it may borrow adjustment

credit. A credit union commenter asked for clarification that once the

institution's application for discount window access is approved, it

may access both adjustment credit and the Special Liquidity Facility.

This commenter also requested clarification that a borrower need not

consider the Special Liquidity Facility as a funding option that must

be exhausted before requesting adjustment credit.

Borrowing under the facility will not be considered a source of

funds that would need to be exhausted before obtaining adjustment

credit. Furthermore, institutions that experience a very short-term

need for Federal Reserve credit (such as meeting reserve requirements

on the last day of a maintenance period), including institutions that

have loans outstanding under the Special Liquidity Facility, could

continue to obtain regular adjustment credit at the basic discount

rate.

One commenter stated that the Federal Reserve will need to address

a wide range of operational issues before implementing the Special

Liquidity Facility, such as the loan request and approval process,

reliance on the 21-day period for perfection of instruments under

borrower-in-custody arrangements, and modifications to automated

systems. As noted above, specific collateral arrangements should be

worked out with the local Federal Reserve Bank.

Other Regulatory and Market Concerns.

One commenter stated that the Board should consider temporarily

suspending certain provisions of the Federal Reserve Act, such as

section 23A, over the century date change period and should expand the

types of markets that it uses for open-market purchases to include, for

example, asset-backed securities markets. Another commenter stated that

the Board should review its payment system risk policy with a view

towards increasing the net debit cap for international banks, given the

significant changes in the market and in payments system practices

since the caps were adopted in 1990. Another commenter stated that the

Reserve Banks should pay interest on deposits of at least 100 basis

points. One commenter also requested that the Federal Reserve take

steps to help banks respond to market fluctuations by adjusting its

lending policies and by allowing late reserve adjustments.

The Board is taking and will continue to take actions that it

determines are appropriate in order to ensure that the banking system

and financial markets continue to operate safely and soundly, with

sufficient liquidity, during the century date change period. If

problems arise related to certain statutory or regulatory requirements,

the Board will consider at that time the appropriate action. Certain

actions, such as paying interest on accounts at Reserve Banks, are not

authorized by statute.

Finally, one commenter suggested that the Reserve Banks revise

Operating Circular 10 (the lending circular) to eliminate the provision

that requires a correspondent bank to object to any debit to its

account for the amount of a loan repayment due from the borrower to the

Reserve Bank within one hour of the time the payment is due or else the

payment is irrevocable. The commenter stated that this provision

requires the correspondent to become the unintended purchaser of the

loan from the Reserve Bank without benefit of the collateral that had

secured the loan. The commenter stated that neither the correspondent

nor the Reserve Bank would face increased risk if the circular were to

eliminate the notion of irrevocability of an unchallenged debit and

require the correspondent to transfer the loan repayment amount

affirmatively to the Reserve Bank. Arrangements regarding correspondent

relationships should be worked out with the local Federal Reserve Bank.

Educational Outreach. One commenter urged the Board to take a

leadership role on providing a flexible regulatory response to possible

temporary declining capital ratios due to century-date-change

activities and to educate rating agencies and the Securities Exchange

Commission that such temporary declines near year-end are not

necessarily a sign of weakened condition. One commenter urged the Board

and other banking agencies to expand Year 2000 outreach efforts to

consumers in order to combat emotional overreaction due to unfounded

rumors and sensational media stories. Another commenter recommended

that the Federal Reserve actively educate depository institutions about

the Special Liquidity Facility. The Board has undertaken a number of

initiatives to provide information on issues related to the century

date change. More information is available on the Board's web

site.8

---------------------------------------------------------------------------

\8\ Seehttp://www.federalreserve.gov/y2k/.

---------------------------------------------------------------------------

Regulatory Flexibility Act Certification

Pursuant to section 605(b) of the Regulatory Flexibility Act (5

U.S.C. 605(b)), the Board certifies that the amendments to Regulation A

will not have a significant adverse economic impact on a substantial

number of small entities. The rule would not impose any additional

requirements on entities affected by the regulation but rather would

make an additional lending facility available to meet depository

institutions' liquidity needs related to the century date change.

List of Subjects in 12 CFR Part 201

Banks, banking, Credit, Federal Reserve System.

For the reasons set out in the preamble, 12 CFR part 201 is amended

as set forth below:

PART 201--EXTENSIONS OF CREDIT BY FEDERAL RESERVE BANKS (REGULATION

A)

1. The authority citation for 12 CFR part 201 continues to read as

follows:

Authority: 12 U.S.C. 343 et seq., 347a, 347b, 347c, 347d, 348 et

seq., 357, 374, 374a and 461.

2. In Sec. 201.2, new paragraphs (j) and (k) are added to read as

follows:

Sec. 201.2 Definitions.

* * * * *

(j) Eligible institution means a depository institution that is in

sound financial condition in the judgment of the lending Federal

Reserve Bank.

(k) Targeted federal funds rate means the federal funds rate

targeted by the Federal Open Market Committee.

3. In Sec. 201.3, new paragraph (e) is added to read as follows:

Sec. 201.3 Availability and terms.

* * * * *

(e) Special liquidity facility for century date change. Federal

Reserve

[[Page 41770]]

Banks may extend credit between and including October 1, 1999, and

April 7, 2000, or such later date as determined by the Board, under a

special liquidity facility to ease liquidity pressures during the

century date change period. This type of credit is available only to

eligible institutions. This type of credit is granted at a special rate

above the basic discount rate and other market rates for funds, is

available for the entire length of the period, and is not subject to

the conditions regarding specific use or exhaustion of other liquidity

sources as is adjustment credit under paragraph (a) of this section.

4. In Sec. 201.6, paragraph (d) is revised to read as follows:

Sec. 201.6 General requirements.

* * * * *

(d) Indirect credit for others. Except for depository institutions

that receive credit under the Special Liquidity Facility described in

Sec. 201.3(e), no depository institution shall act as the medium or

agent of another depository institution in receiving Federal Reserve

credit except with the permission of the Federal Reserve bank extending

credit.

5. In Sec. 201.7, the introductory text is designated as paragraph

(a), and a new paragraph (b) is added to read as follows:

Sec. 201.7 Branches and agencies.

* * * * *

(b) This part applies to a United States branch or agency of a

foreign bank in the same manner and to the same extent as an eligible

institution if the foreign bank is in sound financial condition in the

judgment of the lending Federal Reserve Bank.

6. In Sec. 201.52, the heading is revised and a new paragraph (c)

is added to read as follows:

Sec. 201.52 Other credit for depository institutions.

* * * * *

(c) Special liquidity facility. The rate for credit extended to

eligible institutions under the special liquidity facility provisions

in Sec. 201.3(e) is equal to the targeted federal funds rate plus 1.5

percentage points on each day the credit is outstanding.

By order of the Board of Governors of the Federal Reserve

System, July 27, 1999.

Jennifer J. Johnson,

Secretary of the Board.

[FR Doc. 99-19632 Filed 7-30-99; 8:45 am]

BILLING CODE 6210-01-P