Extended Credit

Extended credit may be provided when exceptional circum­stances or practices adversely affect an individual institution. To obtain extended credit, a borrower must comply with certain conditions: It must make full use of reasonably available alterna­tive sources of funds and have a plan in place for eliminating its liquidity problems. The institution must report special data on its financial condition, including data on its lending, which may be restricted while it is borrowing from the Federal Reserve. The Federal Reserve extends credit of this type in coordination with the borrower's primary supervisor.

When conditions warrant, extended credit may be granted to in­stitutions experiencing difficulties adjusting to changing condi­tions in the money market. For example, during the period of high interest rates in the early 1980s, many thrift institutions suf­fered substantial losses of deposits. In cooperation with the Fed­eral Home Loan Bank System and other supervisors, the Federal Reserve provided temporary assistance to some thrift institutions until they could obtain funding elsewhere or make other adjust­ments to their balance sheets.

In determining whether to lend under the extended credit pro­gram, the Federal Reserve has always reviewed the financial condition of an institution. The Federal Reserve has sometimes pro­vided credit to troubled depositories to facilitate an orderly clo­sure of the institution. In the 1980s, faced with a succession of banking crises and record numbers of bank and thrift institution failures, the Federal Reserve, in cooperation with other regula­tors, extended a significant volume of credit to troubled institu­tions until the problem could be resolved in an orderly fashion.

In the early 1990s, Congress began seeking ways to speed the resolution of troubled institutions in an effort to reduce the cost of bank and thrift institution failures. The outcome of this process was the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). The "prompt corrective action" provisions of FDICIA place increasingly severe restrictions on depositories as their capital positions deteriorate and creates a framework that expedites the resolution of depositories that are close to insolvency.

Among the restrictions imposed by FDICIA on depositories in weak capital condition are limitations on access to the Federal Reserve's discount window. Since December 1993, FDICIA has limited the availability of Federal Reserve credit for undercapital­ized and critically undercapitalized institutions. FDICIA stipu­lates that the Federal Reserve may not lend to an undercapitalized institution for more than 60 days in any 120-day period without incurring a potential liability to the FDIC; exceptions to this rule arise if the borrower's primary federal supervisor certifies that the institution is viable or if the Board conducts its own examination of the borrower and certifies that it is viable. A viable institution is one that is not critically undercapitalized, is not expected to be­come critically undercapitalized, and is not expected to be placed in conservatorship or receivership. FDICIA states that the Federal Reserve may not lend to a critically undercapitalized institution for more than five days beyond the date on which it became criti­cally undercapitalized without incurring a potential liability to the FDIC and must report any liability of this nature to Congress within six months after it is incurred.

Дата добавления: 2014-12-29