Frequently Asked Questions
Why did the Federal Reserve change the discount window at the beginning of 2003? What are the major objectives of the primary and secondary credit discount window facilities?
The restructuring of the discount window at the beginning of 2003, including repositioning the discount rate from below the FOMC's target rate to above the target rate, was designed to improve the window's operation as a mechanism for implementing monetary policy and as a backup source of funds for individual depository institutions.
The primary credit program aids the implementation of monetary policy by: (1) making funds readily available at the primary credit rate when there is a temporary shortage of liquidity in the banking system, thus keeping the actual federal funds rate from rising much above the primary credit rate, (2) making the process of borrowing from the discount window administratively easier, and (3) promoting consistency in the lending function across the Federal Reserve System. By minimizing the administration of and restrictions on the use of discount window credit, and by limiting extensions of credit to generally sound depository institutions, the primary credit program reduces depository institutions' reluctance to borrow, thus making the discount window a more effective policy instrument. The secondary credit program makes credit available, when appropriate, to meet backup liquidity needs of depository institutions that do not qualify for primary credit.
What are the key features of primary credit and secondary credit?
|Feature||Primary Credit||Secondary Credit|
|Rate||Above the FOMC's target for the federal funds rate (except during a financial emergency, when the primary credit rate may be lowered to the FOMC's target for the federal funds rate).
||Primary credit rate plus 50 basis points*.|
|Term||Overnight||Short-term, usually overnight. Can be extended for a longer term if such credit would facilitate a timely return to reliance on market funding or an orderly resolution of a failing institution, subject to statutory requirements (FDICIA restrictions).|
|Eligibility||Depository institutions in generally sound financial condition; essentially the same as eligibility for daylight credit.
||Depository institutions that do not qualify for primary credit.
|Use||No restrictions. May be used to fund sales of federal funds.||As a backup source of funding on a very short-term basis, or to facilitate an orderly resolution of serious financial difficulties.|
|Administration||Ordinarily no questions asked.||Reserve Banks will collect information necessary to confirm that borrowing is consistent with the objectives of the program.|
How do Reserve Banks administer the primary and secondary credit discount window programs?
Primary credit is extended to generally sound depository institutions at a rate above the FOMC's target rate with minimal administrative burden on the borrower. Unless the nature of the borrowing request strongly suggests that the credit extension is not for short-term funds or does not appear consistent with the backup nature of the facility, depository institutions seeking primary credit will be asked only for the minimum information necessary to process the loan; normally they will not be asked why they are borrowing. Depository institutions are not required to seek funds elsewhere before requesting a discount window loan.
Unlike primary credit, the secondary credit program is not a "minimal administration" facility. Reserve Banks will obtain sufficient information about a borrower's financial situation and reasons for borrowing to ensure that an extension of credit complies with the conditions of the program.
Is a depository institution that is eligible for primary credit allowed to use the Federal Reserve as a regular source of funds?
The Federal Reserve expects that, given the pricing of primary credit, institutions will not rely on the discount window as a regular source of funding. Though institutions are not required to seek funding elsewhere before requesting primary credit, primary credit is intended to be used mainly on a very short-term basis, usually overnight, as a backup source of funding. Primary credit is available for a period of up to approximately one month to generally sound depository institutions that cannot obtain funding in the market on reasonable terms. Ordinarily, this will be relevant only for very small institutions.
Are there any restrictions on the use of funds a depository institution borrows from the Federal Reserve under the primary credit program? Under the secondary credit program?
There are no restrictions on the use of primary credit. In particular, borrowers are not prohibited from using primary credit to finance sales of federal funds.
Secondary credit is available to meet backup liquidity needs when its use is consistent with a timely return 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.
How do Reserve Banks determine which financial institutions are eligible for primary credit? For secondary credit? How often is eligibility reassessed? When are institutions notified about their eligibility?
Eligibility for primary credit is limited to depository institutions that are in generally sound financial condition. Reserve Banks determine eligibility on an ongoing basis using supervisory ratings and capitalization data; supplementary information, when available, may also be used. Essentially the same criteria that are used to determine eligibility for daylight credit are used to determine eligibility for primary credit. Institutions that do not qualify for primary credit are eligible for secondary credit. Institutions' eligibility is reassessed as new information about their condition becomes available.
- Depository institutions assigned a composite CAMELS or CAMEL rating of 1, 2, or 3 (or SOSA 1 or 2 and ROCA 1, 2, or 3) that are at least adequately capitalized are eligible for primary credit unless supplementary information indicates that the institution is not generally sound.
- Depository institutions assigned a composite CAMELS or CAMEL rating of 4 (or SOSA 1 or 2 and ROCA 4 or 5) are not eligible for primary credit unless an ongoing examination indicates that the institution is at least adequately capitalized and that its condition has improved sufficiently to be deemed generally sound.
- Depository institutions assigned a composite CAMELS or CAMEL rating of 5 (or SOSA 3, regardless of ROCA) or that are undercapitalized are not eligible for primary credit.
Institutions that had executed borrowing agreements before 2003 were notified of their eligibility for primary or secondary credit at the onset of those programs in January of 2003. Other institutions are notified of their eligibility for primary or secondary credit once they execute a borrowing agreement and submit the agreement to their Reserve Bank. Institutions that have executed and submitted a borrowing agreement will be notified promptly if their eligibility changes.
How is the primary credit rate set?
The Federal Reserve Act requires Reserve Banks' boards of directors to establish the discount rate, subject to review and determination by the Board of Governors, at least every two weeks. Reserve Banks' boards of directors establish the level of the primary credit rate, not a spread relative to another rate. Though the spread between the primary credit rate and the FOMC's target for the federal funds rate has been 100 basis points, the spread could vary. Policymakers sought a rate spread that would give most depository institutions the incentive to obtain regular funding from market sources rather than from the discount window. Experience with the above-market-rate Y2K Special Liquidity Facility, information about the pricing of correspondent lines of credit, and information from other central banks that have above-market-rate lending facilities indicated that a spread of 100 basis points is appropriate to accomplish this goal.
Please note, the spread of the primary credit rate over the FOMC's target federal funds rate was initially 100 basis points. During the financial crisis, this spread was reduced to 50 basis points on August 17, 2007, and was further reduced, to 25 basis points, on March 16, 2008. Effective February 19, 2010, the spread of the primary credit rate over the FOMC's target federal funds rate was increased to 50 basis points. The Federal Reserve will assess over time whether further increases in the spread are appropriate.
Does the Federal Reserve disclose the identity of institutions that borrow from the discount window?
Yes. In accordance with the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. No. 111-203), the Federal Reserve has changed its practices with respect to disclosure of discount window lending information. Effective for discount window loans (primary, secondary, and seasonal credit) extended on or after July 21, 2010, the Federal Reserve will publicly disclose the following information, generally about two years after a discount window loan is extended to a depository institution:
- The name and identifying details of the depository institution;
- The amount borrowed by the depository institution;
- The interest rate paid by the depository institution; and
- Information identifying the types and amounts of collateral pledged in connection with any discount window loan. This disclosure requirement does not apply to collateral pledged by depository institutions that do not borrow
This information will be released quarterly, and may be disclosed with less than a two-year lag if the Chairman of the Federal Reserve determines that it is in the public's interest, and that the disclosure would not harm the purpose or conduct of the discount window. The text of the Dodd-Frank Wall Street Reform and Consumer Protection Act can be found at http://www.gpo.gov/fdsys/pkg/BILLS-111hr4173enr/pdf/BILLS-111hr4173enr.pdf
Does the Federal Reserve publish information about which depository institutions are allowed to borrow from the discount window at the primary credit rate?
The Federal Reserve does not publish information regarding institutions' current eligibility for primary or secondary credit. However, as noted in item 8 above, the Federal Reserve will publicly disclose, with approximately a two-year lag, the interest rate paid on discount window loans. Therefore, a borrowing institution's past eligibility to borrow at the primary credit rate may be inferred.
How do bank supervisors/examiners view an institution's use of primary credit?
The Interagency Advisory on the Use of the Federal Reserve's Primary Credit Program in Effective Liquidity Management (July 23, 2003) encourages depository institutions to consider the discount window as part of their backup liquidity arrangements. As is true of any backup liquidity facility, being prepared to borrow primary credit enhances an institution's liquidity. The Advisory states that “bank supervisors and examiners should view the occasional use of primary credit as appropriate and unexceptional.” Of course, excessive reliance on expensive funding, including heavy use of primary credit, may spark some questions by examiners.
Does the Federal Reserve share the list of depository institutions eligible for primary and secondary credit with bank regulators? Does the Federal Reserve share information about institutions' use of the discount window with bank regulators?
As noted above, the Interagency Advisory on the Use of the Federal Reserve's Primary Credit Program in Effective Liquidity Management (July 23, 2003) encourages depository institutions to consider the discount window as part of their backup liquidity arrangements. The Federal Reserve will provide each federal regulator, at its request, a list showing which of the depository institutions supervised by that regulator have filed borrowing agreements and pledged collateral and thus are prepared to use the primary or secondary credit facilities as a backup source of short-term funds. Also, as noted in item 8 above, the Federal Reserve will publicly disclose, with approximately a two-year lag, certain information on discount window loans extended on or after July 21, 2010.
Otherwise, the Federal Reserve does not routinely share information about institutions' borrowing with regulators. Regulators may, however, obtain information about an institution's borrowing history when they are investigating a potential supervisory problem.
How does the Federal Reserve publish aggregate data on borrowings under the primary and secondary credit programs?
Each week, the Board of Governors reports total borrowing under each lending program for the nation as a whole as well as the sum of borrowing under all programs for each Federal Reserve District.
The Federal Reserve describes the primary credit program as a 'no questions asked' program with minimum administration. What does that mean?
Under the amended Regulation A in place since the beginning of 2003, qualified depository institutions seeking overnight primary credit ordinarily are asked to provide only the minimum amount of information necessary to process the loan. In nearly all cases, this would be limited to the amount and term of the loan. Should an institution's pattern of borrowing or the nature of a particular borrowing request strongly indicate that the depository institution is not using primary credit as a backup source of short-term liquidity, or if the request raises questions regarding an institution's eligibility for primary credit, the Reserve Bank may seek additional information. Depository institutions are not required to seek funds elsewhere before requesting a discount window loan and will not be asked if they have sought funds elsewhere.
As has always been the case, a Federal Reserve Bank has no obligation to make, increase, renew, or extend any loan or advance to any institution.
How many times may a depository institution borrow from the discount window in any given period?
No frequency guidelines exist and there is no expectation that any will be established. Reserve Banks evaluate frequency of borrowing in the context of primary credit being a backup source of short-term liquidity. Moreover, the Federal Reserve encourages depository institutions to borrow primary credit freely when federal funds trade at a rate above the primary credit rate.
Is there any threshold for the size of a loan beyond which a Reserve Bank will ask the depository institution some questions regarding the loan?
No size limitations or thresholds exist. Reserve Banks use judgment to decide when, if at all, a loan request is large enough to warrant asking questions at the time of the request or after the fact.
In what situations may a Reserve Bank extend primary credit for consecutive days? What is the maximum period that credit can be outstanding?
Primary credit may be extended for periods of up to approximately one month to small depository institutions in generally sound financial condition that cannot obtain temporary funds in the market at reasonable terms. Credit extensions outstanding for more than several consecutive days may be subject to increased administration. The borrower may be asked to explain why it needs longer-term credit. Reserve Banks may make multi-day secondary credit loans to enable a timely return to a reliance on market sources of funding or the orderly resolution of a troubled institution. The appropriate duration of multi-day loans will be at the discretion of the local Reserve Bank. Borrowing by depository institutions when the federal funds rate rises to or above the primary credit rate is not subject to any frequency considerations.
What procedures should a depository institution follow to borrow from the discount window?
A depository institution should contact its Reserve Bank using the toll free number listed below:
|Federal Reserve Bank-District||Toll-Free discount window number|
Requests for loans must be made by authorized individuals per the borrowing resolution of the depository institution. Information about legal documentation required to borrow from the discount window is available on this website at http://www.frbdiscountwindow.org/agreements.cfm or from the Reserve Banks. All discount window loans must be secured to the satisfaction of the Reserve Bank.
Institutions may request a loan at any time during the business day. Normally, loans are posted to borrowers' (or their correspondents') accounts at the close of Fedwire (see question 18). Please refer to The Mechanics of Borrowing for additional information.
When are the proceeds of discount window loans made available to the borrower? When is the subsequent repayment posted?
As noted in Operating Circular No. 10 [PDF; 249K], loan proceeds normally are made available at the close of Fedwire (usually 6:30 pm ET ) on the day the advance is approved by the Reserve Bank. Reserve Banks may approve requests for earlier availability. Discount window credit is extended for 24 hours, or multiples thereof. The repayment will be booked at the same time of day that the funds were made available to the borrower.
What is the purpose of the seasonal lending program? Where can I find more information about the seasonal lending program?
Under the seasonal lending program, small depository institutions with a recurring, seasonal need for funds may qualify to borrow from the discount window for up to nine months during the calendar year to meet seasonal borrowing needs of the communities they serve. Institutions with deposits of less than $500 million that experience fluctuations in deposits and loans caused by construction, college, farming, resort, municipal financing and other seasonal types of business frequently qualify for the seasonal lending program. More information about the seasonal lending program is available on the Seasonal Lending Program page of this website.
Did the introduction of the primary and secondary credit programs have any impact on the seasonal credit program?
The only change to the seasonal credit program is that the previous requirement that the seasonal credit rate be at or above the basic discount rate has been eliminated.
If a depository institution is in the seasonal credit program, may it use seasonal credit rather than the primary credit facility for short-term needs?
Yes. If an institution qualifies for and is granted a seasonal line, the institution decides when to draw on the line.
Payment System Risk FAQs
What is a daylight overdraft?
A daylight overdraft occurs when an institution's Federal Reserve account has a negative balance at any point during the Fedwire operating day. Daylight overdrafts are also referred to as Federal Reserve's intraday credit.
May all institutions that have a Federal Reserve account incur daylight overdrafts?
Depository institutions with regular access to the discount window may incur daylight overdrafts. Institutions that have a Federal Reserve account but do not have regular access to the Discount Window are not permitted to incur daylight overdrafts. The Reserve Bank may also limit access to intraday credit for other institutions that present increased risks, such as institutions in weak financial condition or institutions incurring overdrafts in violation of the PSR policy.
Are there limits to daylight overdrafts an institution can incur in its Federal Reserve account?
Each institution that maintains a Federal Reserve account is assigned or may establish a net debit cap ("cap"), which limits the amount of daylight overdrafts that the institution may incur in its Federal Reserve account. An institution's cap category and its capital measure determine the dollar amount of its net debit cap.
What is a cap breach?
A cap breach is a negative end-of-minute balance in an institution's Federal Reserve account that exceeds its net debit cap or its "max cap" (single-day cap plus additional capacity).
How are daylight overdrafts monitored?
The Federal Reserve uses a schedule of posting rules, identified in the PSR policy, to determine whether a daylight overdraft has occurred in an institution’s account. The daylight overdraft posting rules define the time of day that debits and credits for transactions processed by the Federal Reserve will post to an institution's account. The Federal Reserve measures an institution’s daylight overdraft activity, monitors its compliance with the PSR policy, and calculates daylight overdraft charges on an ex-post basis
What are the Federal Reserve's expectations regarding account management?
The Federal Reserve expects institutions that maintain Federal Reserve accounts to monitor their account balances on an intraday basis in order to comply with the PSR policy. Institutions should be aware of the payments made from their accounts each day and know how those payments are funded. Institutions are expected to use their own systems and procedures, as well as the Federal Reserve's systems, to monitor their Federal Reserve account balance and payment activity. Institutions are also expected to maintain procedures to manage their accounts in contingency situations and during periods of service disruptions. Daylight overdrafts that result in overnight overdrafts are strongly discouraged and subject to an overnight overdraft penalty fee.
What are the most recent revisions to the PSR policy?
The following revisions to the PSR policy, effective July 23, 2015, are designed to enhance the efficiency of the payment system by aligning the PSR posting rules more closely with current operations for automated clearing house (ACH) debit transactions and commercial check transactions and strategically position the rules for future advancements in the speed of clearing and settlement. The Federal Reserve Board amended the PSR policy to:
- Move the posting time for ACH debit transactions to 8:30 AM ET from 11:00 AM ET to align with the posting of ACH credit transactions.
- Establish new posting times for commercial check credits and debits at 8:30 AM ET, 1:00 PM ET, and 5:30 PM ET.
Are institutions required to collateralize daylight overdrafts?
Under the PSR policy, collateralization of daylight overdrafts by healthy depository institutions is voluntary to avoid disrupting the operation of the payment system and creating a burden for a large number of small users of daylight overdrafts. Eligible institutions that collateralize daylight overdrafts receive a zero fee for those overdrafts.
What is the purpose of collateral under the PSR policy?
Institutions with regular access to the discount window can incur daylight overdrafts and may pledge collateral voluntarily to reduce or offset daylight overdraft fees. Any collateral that an institution has pledged to its Reserve Bank that is not securing an extension of credit, such as a discount window loan, will automatically be applied to offset the institution's daylight overdraft fees.
Collateral may also be used to support a max cap or to meet a Reserve Bank's collateral requirement that may be applicable, for example, for institutions in weak financial condition. Collateral pledged to support a max cap or to support a collateral requirement will be applied to offset an institution's daylight overdraft fees.
Are there separate accounts for discount window and PSR collateral at the Federal Reserve?
All collateral pledged for discount window and PSR purposes resides in one account, called the FR collateral account. Collateral pledged to the Reserve Bank for Treasury purposes (TT&L collateral) is pledged into a different collateral account and is not applied to an institution's daylight overdraft fee calculation.
What type of collateral is acceptable for PSR purposes?
Any collateral eligible to be pledged at the discount window is eligible for PSR purposes as well. A listing of the most commonly pledged asset types can be found by clicking on the Collateral Margins Table on this site. Additionally, in-transit collateral may be pledged for PSR purposes at Reserve Bank discretion. All collateral must be acceptable to an institution's Reserve Bank.
What steps should institutions take to ensure collateral already pledged for discount window purposes is applied toward daylight overdraft purposes?
Collateral already pledged for discount window purposes, which is not securing an outstanding discount window loan, will be automatically applied for daylight overdrafts purposes.
What steps should institutions take to pledge collateral for daylight overdraft purposes, if collateral is not already pledged?
The requirements for pledging collateral under the PSR policy are the same as those for pledging to the discount window. Institutions interested in pledging collateral for discount window or PSR purposes must complete certain legal documents (authorizing resolutions and agreements) with their Reserve Bank, specifically, Operating Circular No. 10 documents.
How can institutions monitor collateral applied for daylight overdraft purposes?
Institutions can access near-real-time collateral information in the Federal Reserve's Account Management Information (AMI) system. Through AMI's collateral service, institutions can view and download aggregate and CUSIP-level collateral activity information intra-day, and download ex-post reports. This collateral information is provided in addition to the periodic statement(s) of collateral holdings that institutions currently receive from the Collateral Management System (CMS) via email.
Additional information on AMI is available under Account Services on the Federal Reserve Bank Services Website. Additional information on accessing collateral information through AMI is available in the Account Management Guide [PDF; 3.4GB].
If collateral information is unavailable in AMI intra-day, institutions should contact their local Reserve Bank for collateral balances.
Are there limits on intraday credit even when the credit is fully collateralized?
A net debit cap applies to the total collateralized and uncollateralized daylight overdrafts. The Federal Reserve believes that it is prudent to have limits on intraday credit even when the credit is fully collateralized. Limits or caps complement the use of collateral in risk mitigation.
How is a net debit cap calculated?
An institution's net debit cap is calculated as its cap multiple times its capital measure:
Net debit cap = cap multiple x capital measure.
Because an institution's net debit cap is a function of its capital measure, the dollar amount of the cap will vary over time as the institution's capital measure changes. An institution's cap category is normally set for one year, but the Reserve Bank will monitor the condition of all accountholders throughout the year to ensure that they remain eligible for their respective caps.
Does the amount of collateral pledged increase an institution's net debit cap?
Collateralized intraday credit does not increase an institution's net debit cap; it simply offsets the institution's fees associated with an extension of intraday credit. An institution that requires capacity that exceeds its net debit cap must apply for maximum daylight overdraft capacity (max cap). For more information on applying for a max cap, institutions should contact their local Reserve Bank.
What is a max cap?
Maximum daylight overdraft capacity or "max cap" is an institution's net debit cap plus its Federal Reserve approved collateralized capacity. Only institutions with self-assessed net debit caps are eligible to request a max cap from the Federal Reserve.
What is a streamlined max cap procedure for eligible foreign banking organizations (FBOs)?
The streamlined max cap procedure offers additional capacity more efficiently to eligible FBOs. Eligible institutions include FBOs that are FHCs or SOSA 1-rated institutions and have a self-assessed net debit cap. The streamlined procedure allows eligible FBOs to request from the Reserve Banks additional capacity of up to 100 percent of worldwide capital times the self-assessed cap multiple without documenting a specific business need for additional capacity or providing a board-of-directors resolution authorizing the request for a max cap.
Are fully collateralized daylight overdrafts in excess of a net debit cap considered a violation of the PSR Policy?
The policy allows de minimis, self-assessed, and max cap institutions to fully collateralize up to two cap breaches in two consecutive reserve-maintenance periods without violating the policy.
How can institutions monitor their daylight overdraft position and charges?
Throughout the Fedwire® day, institutions can access the Account Management Information (AMI) system to monitor their daylight overdraft positions and collateral information in real time. Ex-post, institutions can access daylight overdraft and charge reports, including collateral information, via AMI and FedLine Direct®.
"FedLine Direct" and "Fedwire" are trademarks or service marks of the Federal Reserve Banks. A complete list of trademarks owned by the Federal Reserve Banks is available at http://www.frbservices.org/.
How are institutions charged for daylight overdrafts?
The Reserve Banks calculate and assess daylight overdraft charges on the basis of a two-week maintenance period as follows:
- A zero fee applies to collateralized daylight overdrafts for institutions with regular access to the discount window,
- A 50 basis point fee applies to uncollateralized daylight overdrafts for institutions with regular access to the discount window,
- A 150 basis point penalty fee is assessed for daylight overdrafts incurred by institutions that do not have regular access to the discount window and therefore are subject to a penalty fee, and
- A fee waiver of $150 is subtracted from the gross fees of institutions with regular access to the discount window.
How are daylight overdraft fees calculated for institutions with regular access to the discount window?
The Federal Reserve determines the extent to which a daylight overdraft is collateralized by comparing an institution's end-of-minute daylight overdraft balance to the value of FR collateral pledged by the institution (less outstanding extensions of credit) at that minute. If the value of the institution's FR collateral meets or exceeds its daylight overdraft for a given minute, then that minute of overdraft is considered fully collateralized and will receive a zero price. If the daylight overdraft balance exceeds the collateral available for daylight overdraft purposes, the portion of the daylight overdraft that is uncollateralized is included in the calculation of the institution's fees.
In calculating an institution's fees, the value of collateral in the FR account (less outstanding extensions of credit) is subtracted from all negative end-of-minute account balances to determine the institution's uncollateralized negative end-of-minute balances. The uncollateralized negative end-of-minute account balances are summed and divided by the number of minutes in the Fedwire funds transfer operating day to arrive at the daily average uncollateralized daylight overdraft, which is assessed a 50 basis point (annual rate) fee. Daily daylight overdraft fees for each reserve maintenance period are added together and reduced by the amount of the fee waiver ($150).
For more information on how the Federal Reserve calculates daylight overdraft fees, see the Overview of the Federal Reserve's Payment System Risk Policy [PDF; 184K] or the Guide to the Federal Reserve's Payment System Risk Policy [PDF; 603K].
How are daylight overdraft fees calculated for institutions without regular access to the discount window?
Institutions without regular access to the discount window are not eligible for daylight overdrafts, a zero price for collateralized daylight overdrafts, or the fee waiver. Such institutions are charged a penalty fee for any daylight overdrafts they do incur.
What is a fee waiver?
The fee waiver aims to reduce the burden of the PSR policy on institutions that use small amounts of intraday credit. The amount of the fee waiver is $150 per institution, per reserve maintenance period. Institutions that incur fees under $150 in a reserve maintenance period are not assessed any fees. Institutions that incur fees over $150 in a reserve-maintenance-period have their gross fees reduced by $150. The fee waiver is not available for institutions without regular access to the discount window. The waiver does not result in refunds or credits to an institution.
What collateral is acceptable to pledge for discount window or PSR purposes?
The Federal Reserve Banks will consider accepting as discount window or PSR collateral any assets that meet regulatory standards for sound asset quality. A detailed listing of acceptability criteria is available in The Federal Reserve System's Collateral Guidelines [PDF; 193K]. Depository institutions should direct questions regarding specific assets to discount window staff at its Reserve Bank.
How can a depository institution monitor its collateral value on an ongoing basis?
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?
"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. An institution can contact the discount window staff at its Reserve Bank to ensure it receives maximum collateral value for loan types for which the minimal/normal risk distinction can be made.
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?
These terms refer to the way the Federal Reserve Banks receive and 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. Generally all loans should be individually deposited with the exception of credit card receivables, which continue to be “group deposited.”
What if an institution cannot provide its pledged loan listing in a format that is supported by the ALD process?
If an institution is unable to provide its pledged loan listing in a file format that is compatible with the ALD process, an exception may be made upon approval by the Reserve Bank. If approved, the institution will be asked to provide additional summary information on pledged loans. In these circumstances, the Federal Reserve calculates an internally modeled fair market value estimate and applies a margin to the loan pool, based on the extent of the institution's ability to provide the requested additional summary information.
How does the Federal Reserve determine the collateral value for pledged loans?
The Federal Reserve uses reported cash flow characteristics and proxy credit spreads to calculate a fair market value estimate for each pledged loan. When individual loan cash flow characteristics are not available, the Federal Reserve uses general assumptions to estimate the fair market value of the loan pool.
Margins for loan collateral are likewise based on reported cash flow characteristics. Margins are established based on the historical volatility of risk-free rates and proxy credit spreads, measured over typical liquidation periods.
How does the Federal Reserve determine the collateral value for pledged securities?
Securities are valued using prices supplied by external vendors. Securities for which a price is unavailable from Federal Reserve external vendors will receive zero collateral value.
Margins for securities are assigned based on asset type and duration. Margins are established based on the historical price volatility of each category, measured over typical liquidation periods.
May a depository institution pledge asset-backed commercial paper?
Federal Reserve Banks accept investment grade commercial paper. Asset-backed commercial paper (ABCP) 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.
May a depository institution pledge subprime mortgages and other subprime consumer debt?
The Federal Reserve Banks accept performing consumer loans. This could include subprime mortgages and other subprime consumer debt.
May a depository institution pledge a structured debt obligation containing subprime mortgages in the underlying collateral?
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.
New ALD Collateral Requirements FAQs
Are institutions required to submit the new ALD collateral reports now?
No. “In-scope” institutions are not required to send in the new ALD collateral reports at this time. However, these institutions are encouraged to send in their new collateral reports prior to the May 2019 deadline to ensure they comply with Federal Reserve System requirements.
It was previously communicated that beginning in May 2019, institutions must submit the existing ALD collateral report and the new ALD collateral report at the same frequency and on the same “as-of” date as they submit their current reports. As such, beginning in May 2019, the existing ALD collateral report and the new ALD collateral report with the additional loan fields should contain the same set of pledged loans.
What can I expect once my institution sends in a new ALD collateral report?
Once your institution submits a new ALD collateral report, your local Reserve Bank will contact you in the event revisions need to be made (for instance, if formatting errors are present) or if there are questions regarding the loan fields that are provided. In addition, your local Reserve Bank may also contact you in order to plan and perform validation work on the data within the new ALD collateral report (i.e. request for certain pledged loan documentation).
What does my institution need to do now?
The purpose of the November 28, 2017 communication was to let all “in-scope” institutions account for this effort as part of their information technology project schedule and to begin sourcing the new loan fields. The February 6, 2018 communication provided details to institutions about creating the new loan file as well as some clarifications to loan field definitions. The May 24, 2018 communication begins the 12 month period institutions have to complete construction of the new loan file in accordance with the requirements published on the Discount Window Website. As of May 2018, DIs will have 12 months to ensure that they are able to provide the required loan fields. Beginning in May 2019, “in-scope” DIs must submit both their existing ALD collateral report as well the new ALD collateral report with the additional loan fields. Those institutions that are not required to submit any additional loan fields do not need to make any changes to their ALD collateral report submission practices.
Where can I find the list of the new required loan fields for “in-scope” institutions?
The set of existing loan fields that are required of all DIs, along with the additional loan fields and corresponding definitions required of "in-scope" DIs, can be found on the New Automated Loan Deposit (ALD) Collateral Requirements page. All other institutions do not need to submit any additional loan fields. If your institution has any questions regarding loan field definitions you can submit them here.
How should the new ALD collateral reports be formatted and transmitted to the Federal Reserve?
Details surrounding the new format and transmission methods were published to the Discount Window website on February 6, 2018 and can be found here. “In scope” institutions that have specific questions regarding file construction can submit questions here or contact their local reserve bank. All other institutions do not need to make any changes to their current pledged loan files or their transmission process.
Should institutions continue to submit their existing ALD collateral reports?
“In-scope” institutions will be required to submit both their current ALD collateral reports as well as the new ALD collateral reports with the additional loan fields in a new format starting in May 2019. The dual file submission process is expected to last approximately 18 months, after which only the new ALD collateral report with the additional required fields will need to be submitted. Those institutions that are not required to submit any additional fields do not need to make any changes to their ALD collateral report submission practices.
If institutions have questions about the new ALD collateral report requirements, who should they contact?
Institutions may also contact their Federal Reserve Bank's Discount Window collateral staff with any inquiries.
Is the Federal Reserve making any changes to collateral eligibility in connection with the new ALD collateral report requirements?
No. The Federal Reserve is not making any changes to collateral eligibility in connection with the new ALD collateral report requirements. Please refer to the Federal Reserve Collateral Guidelines for questions concerning eligibility.
Will the margins table be affected by these changes?
Not at this time. The existing ALD collateral report will continue to be used for valuation and margining purposes, while the new ALD collateral report with the additional fields will be used to test and calibrate the new margins and internal fair market value estimates, which will be announced on a future date.
How will collateral values be affected for institutions that are not required to comply with the new ALD collateral reporting requirements?
The Federal Reserve utilizes the same internal model to derive values for all loan collateral pledged by any institution. Institutions that are not required to comply with the new ALD collateral reporting requirements will receive collateral based on the data provided by the “in-scope” institutions. These values, in addition to the loan data fields that are currently reported to the Federal Reserve, will be used to assign margins and internal fair market value estimates for pledged loans. This will take effect once the testing and calibration of margins and internal fair market value estimates are complete.
Will new ALD collateral reports continue to be “individually deposited” and “group deposited”?
No. In general, new ALD collateral reports for “in-scope” institutions will all be “individually deposited”. "Group deposited” loans will be approved on a case by case basis. The set of existing loan fields that are required of all DIs can be found on the New ALD Collateral Requirements page, while “in scope” DIs can find a detailed list of all additional loan fields with definitions here. Institutions that are not “in-scope” will continue to pledge either “individually deposited” or “group deposited” loans as directed by their local Federal Reserve Bank.
Where is there further information about Discount Window and Payment System Risk collateral?
Additional information is available in the New Requirements for Automated Loan Deposit section of this website. Information is also available from discount window staff at the Federal Reserve Banks.
Have the ALD file format specifications document changed?
Yes. The ALD file format specifications document has been revised in order to account for clarifications to certain required loan field definitions and formatting requirements. An updated final detailed list of the additional loan fields, along with definitions, can be found here. This document is intended to be in its final form; however, any additional changes deemed necessary will be communicated to institutions as soon as they are known. Changes have been highlighted in a separate document, which can be found here.
Do these requirements apply to pledges of credit cards?
Yes. As noted in a separate FAQ, credit card pledges are to be reported based on credit score “pools,” with each “pool” having a set credit score threshold. Required loan fields for credit card pledges will take the form of sums or weighted averages of all credit card accounts in a given “pool.” Separate submissions of Prime and Subprime credit cards are no longer required for in-scope institutions; since credit card reporting is now “pool”-based, only one submission covering all credit cards is needed. However, the format in which an in-scope institution will be required to deliver the new loan fields will be at the discretion of each Federal Reserve Bank. For instance, your Federal Reserve Bank may require you to build and submit a new loan file in accordance with the file format instructions and specifications included within this communication or may instruct you to follow different file format guidance. Federal Reserve Banks will inform in-scope institutions pledging credit cards of their required format by May 31, 2018. Please note that if your institution currently reports credit card data at the account level, your local Federal Reserve Bank may continue to require this submission for the life of the pledge and will inform you of this requirement by May 31, 2018.
Do these requirements apply to other loan fields that my Federal Reserve Bank requires but are not part of the new request?
No. These requirements do not apply to other loan fields that a local Federal Reserve Bank may collect from a given institution. Your local Federal Reserve Bank will inform you whether these loan fields will continue to be required by May 31, 2018. If so, these loan fields can be appended to the new loan file submission (for any given loan type, this would be to the right of the last loan field required according to the loan file specifications) in the format that is communicated by your local Federal Reserve Bank.
What are the consequences of not submitting the required loan fields?
All loan fields displayed within the ALD collateral report format specifications document are required. Collateral valuation adjustments may be applied to pledged loans that are missing required loan fields; these may include the following:
a. Application of a default value to a missing loan field. Default values are designed to be fair, non-penalizing values based upon the data provided by other "in-scope" institutions.
b. Assignment of zero collateral value to the impacted loans; or
c. Other collateral value adjustments as deemed warranted
Notwithstanding the above, there will be a subset of missing loan fields whereby a pledged loan will automatically receive zero collateral value. This subset includes the loan fields of Balance, Interest Rate, Maturity Date, DI Internal Risk Rating, FX/FL Flag, Interest Rate Spread, Credit Bureau Score Current (credit cards only) and APR (credit cards only). This subset may be expanded at the discretion of the Federal Reserve System.
Please note that collateral valuation adjustments will only occur once the new ALD collateral reports are used to calculate collateral values, which is targeted for year-end 2020. Please also note that the intent of the Federal Reserve System is for the required loan fields to be sourced in an automated fashion. If you have concerns regarding your ability to provide the required loan fields, please submit them here or contact your local Federal Reserve Bank as soon as possible.
Does the definition of a master note include standard lines of credit where the borrower is authorized to make multiple advances?
No. A master note is defined as a lending facility in which a borrower has the ability to make one or multiple draws (the cumulative amount of which cannot exceed the master note amount) whereby each draw becomes a distinct loan with its own unique Obligation Number, all of which being reported as separate loan detail records with distinct sets of loan field values. Please note that, as opposed to draws under a master note, draws under a single line of credit are not to be reported as separate pledged loans. Please refer to the revised ALD Collateral Requirements Definitions and the Highlighted Loan File Changes documents for more information.
Are the allowable values for the Interest Rate Index loan field meant to capture both domestic and foreign indices?
Are there certain loan fields that are the same as data elements required for Y-14 reporting?
Yes. Currently, there are 13 loan fields that are the same as data elements required for Y-14 reporting, which are spread across nine loan types. If your institution feels that this information would assist in building the new loan file, please send an e-mail to SYS.ALD.Info@bos.frb.org and it will be made available.
Where should call report codes be sourced from and how should they be formatted on the new ALD collateral report?
Depending on the type of institution, call report codes should be sourced from either the FFIEC 031/041 report, the NCUA call report (Statement of Financial Condition/Schedule A) or the FFIEC 002 report. Please format call report codes without periods, parentheses or capital letters. For example:
Why is the Federal Reserve introducing an updated discount window and payment system risk collateral margins table?
The Federal Reserve annually reviews its collateral margins table and models. The changes reflect analytical improvements in the methodology and the use of updated market data. The updated collateral margins table will be effective on July 1, 2019.
Is the Federal Reserve's updated collateral margins table a response to financial conditions or a signal that markets are improving or deteriorating?
No. The Federal Reserve continually conducts reviews and adjusts collateral valuation and margin practices. The updated collateral margins table incorporates improved methodology and updated market data and is not a response to particular financial conditions.
Will the changes negatively impact depository institutions' ability to utilize the discount window and collateralized daylight credit?
The impact on individual depository institutions will vary depending upon the composition of collateral pledged. The lag between the announcement and implementation of the updated collateral margins will provide depository institutions time to work with their Reserve Banks to pledge additional collateral if needed or desired.
How can a depository institution monitor its collateral value on an ongoing basis?
An institution can review its Statement of Collateral Holdings to determine the total value of its collateral as well as the collateral value for security holdings and loan types. An institution should contact its Federal Reserve Bank to sign up for electronic delivery of its Statement of Collateral Holdings. Institutions that use Account Management Information (AMI) may also view their collateral value through that application. Note that prior to July 1, 2019, these sources will reflect values calculated under the margins table in effect at that time.
How will a depository institution know whether it will need to pledge additional collateral due to the implementation of the updated collateral margins table, effective July 1, 2019?
The Federal Reserve has already begun analyzing all depository institutions’ current discount window borrowings and payment system risk collateral requirements relative to their collateral values under the new collateral margins table. The Federal Reserve Banks will notify depository institutions whose pledged collateral would not be sufficient in advance of the implementation date.