Borrowing procedures

Borrowing eligibility

Before the passage of the Monetary Control Act of 1980, only banks that were members of the Federal Reserve System enjoyed regular access to the discount window. The Monetary Control Act extended reserve requirements to nonmember institutions and provided that any institution holding deposits subject to reserve requirements (such as transaction accounts and nonpersonal time deposits) would have the same access to the discount window that member institutions have.

Institutions eligible to borrow at the discount window include do­mestic commercial banks, U.S. branches and agencies of foreign banks, savings banks, savings and loan associations, and credit unions. Many depository institutions meet the eligibility criteria —about 11,000 banks (including U.S. branches and agencies of for­eign banks) and 16,000 thrift institutions (including credit unions) at the end of 1993. Eligibility to borrow is in no way contingent upon or related to the use of Federal Reserve priced services.

Institutions that expect to borrow at the discount window typi­cally execute a set of legal documents with the Federal Reserve that specify the terms and conditions under which discount win­dow credit will be granted and the requirements for collateral pledged to secure such loans.

All discount window credit must be secured to the satisfaction of the Federal Reserve Bank that is providing the credit. Satisfactory collateral generally includes U.S. Treasury and federal agency se­curities and, if of acceptable quality, mortgage notes covering one-to four-family residences; state and local government securities; and business, consumer, and other customer notes. Although col­lateral is generally held in safekeeping at the Federal Reserve Banks or by acceptable third-party custodians, borrowers in good financial condition may be permitted to hold their own collateral, appropriately earmarked; lending against borrower-held collat­eral, however, is usually of only short duration.

Federal Reserve Banks ensure that the value of collateral pledged to secure a discount window loan exceeds the amount of the loan. The extra cushion of collateral helps protect the Reserve Banks against loss in the event that a borrower defaults.

Technically, discount window credit can be extended as a discount of eligible paper (notes, drafts, and bills of exchange) or as an ad­vance secured by collateral. Although these are two distinct forms of credit, both practices are customarily referred to as discounting, and the interest rate charged on such borrowing is called the dis­count rate. When obtaining credit in the form of a discount, the borrowing depository institution transfers eligible paper carrying its legal endorsement to the Federal Reserve Bank. In return, the borrower is credited in an amount equal to the discounted value of the eligible paper at the current discount rate. When the dis­counted paper matures, it is returned to the borrower, and the borrower's reserve account is debited by the full amount of the paper. An advance is simply a loan by a Federal Reserve Bank to the borrowing institution on its note secured by adequate collat­eral. At one time, discounts were the predominant form of dis­count window credit. From an operational perspective, however, advances are more convenient, and thus for many years all dis­count window credit has been in the form of advances.

The Federal Reserve most often makes a loan by crediting the re­serve account of the borrowing institution. For borrowers that do not maintain accounts with the Federal Reserve, credit is ex­tended by increasing the reserve account of the borrower's corre­spondent bank (a bank that has agreed to accept the deposits of, and perform services for, another); essentially, the Federal Re­serve writes a check on itself, which the borrower then deposits with its correspondent bank. All loans, whether adjustment, sea­sonal, or extended credit, are technically demand notes and hence have no real maturity. As a matter of convenience, discount offic­ers may arrange to extend credit for a period of time without re­quiring the borrowing institution to make a formal request to re­new the loan each day.

Дата добавления: 2014-12-29