Frequently Asked Questions
Collateral
Last Updated: 12/7/2009
The Federal Reserve Banks accept a broad range of assets as discount window collateral. Discount window loans must be collateralized to the satisfaction of the local Reserve Bank.
Since the Federal Reserve's announcement 
of temporary changes to its primary credit facility on August 17, 2007, the following questions have been asked frequently. The answers indicated below are intended to provide general guidance; however, depository institutions are encouraged to raise any specific questions with Reserve Bank discount window staff in their respective district. In addition, please refer to the July 30, 2008 Federal Reserve announcement of a collateral requirement for long-term advances.
- What collateral is acceptable for pledge at the discount window?
- How can a depository institution monitor its collateral value on an ongoing basis?
- How does the Federal Reserve determine collateral value for pledged securities?
- For certain types of loans, the collateral margins table lists separate margins for "minimal risk rated" and "normal risk rated" loans. What is the difference between "minimal risk rated" and "normal risk rated" loans?
- The collateral margins table shows the margins for loans divided into two groups: "individually deposited" and "group deposited" loans. What is the difference between "individually deposited" and "group deposited" loans?
- How does the Federal Reserve determine the collateral value for pledged loans?
- Why are individually deposited loan margins presented as ranges rather than discrete values on the collateral margins table?
- Is senior unsecured debt issued under the FDIC's Temporary Liquidity Guarantee Program (TLGP) or the NCUA's Temporary Corporate Credit Union Liquidity Guarantee Program (TCCULGP) eligible to pledge for discount window or payment system risk collateral purposes?
- May a depository institution pledge asset-backed commercial paper?
- May a depository institution pledge sub-prime mortgages?
- May a depository institution pledge a structured debt obligation containing sub-prime mortgages in the underlying collateral?
The Federal Reserve Banks will consider accepting as discount window collateral any assets that meet regulatory standards for sound asset quality. A detailed listing of acceptability criteria is available in the Discount Window and Payment System Risk Acceptance Criteria for Commonly Pledged Asset Types [MS Excel; 40K]. Depository institutions should direct questions regarding specific assets to Reserve Bank staff.
An institution can review its collateral statements to determine the total value of its collateral as well as the collateral value for individual assets. An institution can contact its Reserve Bank to sign up for electronic delivery of its collateral statements.
As part of the initiative to implement changes to the Payment System Risk policy in late 2010 or early 2011, the Federal Reserve is also developing enhancements to provide institutions with improved access to information on collateral pledged to their Federal Reserve Bank.
Securities are typically valued using prices supplied by external vendors. The published margin is applied to the vendor price to determine the collateral value. Securities for which a vendor price is not available will be assigned an estimated value when the Federal Reserve can reasonably estimate a value from market information using internal valuation models. The lowest margin for that asset type will be applied.
"Minimal risk rated" loans have credit risk levels that are similar to investment grade bonds. "Normal risk rated" loans have credit risk levels that are similar to below investment grade bonds while remaining "pass" credits from a regulatory standpoint. The minimal/normal risk distinction is available for agricultural, commercial, commercial real estate, construction, and raw land loans. Depository institutions can contact their Reserve Bank to ensure they receive maximum collateral value for loan types for which the minimal/normal risk distinction can be made.
These terms refer to the way the Federal Reserve Banks maintain information about pledged loans in their Collateral Management System (CMS). Loans that are recorded individually into CMS are considered "individually deposited." Loans are individually deposited if they are pledged through the Automated Loan Deposit process. Loans held in the custody of a Federal Reserve Bank and pledges of small pools of loans may also be entered into CMS individually. All other loan pledges are recorded into CMS as groups and are thus considered "group deposited."
The collateral value of individually deposited loans will always be greater than or equal to that of comparable group deposited loans. The Federal Reserve is modifying the Automated Loan Deposit process to facilitate wider adoption; further information about these changes will be announced at a later date.
The collateral value of pledged loans depends, in part, on the manner in which the loans are pledged:
For loans that are pledged through the Federal Reserve's Automated Loan Deposit process (ALD), or "individually deposited loans," the Federal Reserve calculates an internally modeled fair market value estimate for each pledged loan, based on loan-specific characteristics. The margin published on the Discount Window and PSR collateral margins table [MS Excel; 80K] is applied to the Federal Reserve's internally modeled fair market value estimate for each loan, based on its type, coupon, and time to maturity, to determine collateral value. While the Federal Reserve's internally modeled fair market value estimate for each pledged loan will fluctuate on an ongoing basis, for institutions in sound financial condition, the collateral value of individually deposited loans will never be below the value received for loans pledged through alternative means. The lendable value for any group deposited loan type acts as a floor for the lendable value of individually deposited loans of the same type.
For loans that are pledged through alternative means ("group deposited loans"), the margin published on the collateral margins table is applied to the Federal Reserve's internally modeled fair market value estimate of a typical loan pool for each loan type.
The Federal Reserve's internally modeled fair market value estimates are updated monthly, effective the first business day of each month, for both individually and group deposited loans.
The margin applied to an individually deposited loan's internally modeled fair market value estimate depends upon the type, coupon, and time to maturity of the loan. The margins for particular coupon-maturity combinations can be viewed by clicking on the margin range in the collateral margins table [MS Excel; 80K].
Yes. Senior unsecured debt issued under the FDIC's TLGP and the NCUA's TCCULGP program may be pledged for discount window or payment system risk purposes.
Federal Reserve Banks accept investment grade commercial paper. Asset-backed commercial paper is viewed as a particular type of commercial paper and thus is eligible for consideration. Reserve Bank discount window staff may request information on the structure and/or the quality of the underlying assets in order to assign appropriate collateral value.
The Federal Reserve Banks accept performing mortgages. This could include sub-prime mortgages.
Debt obligations containing subprime mortgages are acceptable as collateral if they meet Federal Reserve Bank acceptability requirements, including credit quality and tranche type. AAA-rated collateralized debt and mortgage obligations are examples of acceptable structured debt obligations.
