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67777

Rules and Regulations Federal Register
Vol. 67, No. 216

Thursday, November 7, 2002

This section of the FEDERAL REGISTER Register on July 3, 2002 (67 FR 44523– a minimal economic effect on any
contains regulatory documents having general 44524, Docket No. 01–093–2), we affected entities operating in this area.
applicability and legal effect, most of which amended the regulations by removing a We anticipate that the economic effect
are keyed to and codified in the Code of portion of Los Angeles County, CA, of lifting the quarantine, though
Federal Regulations, which is published under from the list of quarantined areas in positive, will be no more significant
50 titles pursuant to 44 U.S.C. 1510.
§ 301.78–3(c). The interim rule was than was the minimal effect of its
The Code of Federal Regulations is sold by necessary to relieve restrictions that imposition.
the Superintendent of Documents. Prices of were no longer needed to prevent the Under these circumstances, the
new books are listed in the first FEDERAL spread of Medfly to noninfested areas of Administrator of the Animal and Plant
REGISTER issue of each week. the United States. As a result of that Health Inspection Service has
action, there are no longer any areas in determined that this action will not
the continental United States have a significant impact on a
DEPARTMENT OF AGRICULTURE quarantined because of the Medfly. substantial number of small entities.
Comments on the interim rule were
Animal and Plant Health Inspection required to be received on or before List of Subjects in 7 CFR Part 301
Service September 3, 2002. We did not receive Agricultural commodities, Plant
any comments. Therefore, for the diseases and pests, Quarantine,
7 CFR Part 301 reasons given in the interim rule, we are Reporting and recordkeeping
[Docket No. 01–093–3]
adopting the interim rule as a final rule. requirements, Transportation.
This action also affirms the
Mediterranean Fruit Fly; Removal of information contained in the interim PART 301—DOMESTIC QUARANTINE
Quarantined Area rule concerning Executive Orders NOTICES
12866, 12372, and 12988, and the
AGENCY: Animal and Plant Health Paperwork Reduction Act. Accordingly, we are adopting as a
Inspection Service, USDA. Further, for this action, the Office of final rule, without change, the interim
ACTION: Affirmation of interim rule as Management and Budget has waived its rule that amended 7 CFR part 301 and
final rule. review under Executive Order 12866. that was published at 67 FR 44523–
44524 on July 3, 2002.
Regulatory Flexibility Act
SUMMARY: We are adopting as a final Authority: 7 U.S.C. 166, 7711, 7712, 7714,
rule, without change, an interim rule This action affirms an interim rule 7731, 7735, 7751, 7752, 7753, and 7754; 7
that amended the Mediterranean fruit that amended the Medfly regulations by CFR 2.22, 2.80, and 371.3.
fly regulations by removing a portion of removing a portion of Los Angeles Section 301.75–15 also issued under Sec.
Los Angeles County, CA, from the list of County, CA, from the list of quarantined 204, Title II, Pub. L. 106–113, 113 Stat.
quarantined areas. The interim rule was areas. The interim rule was necessary to 1501A–293; sections 301.75–15 and 301.75–
necessary to relieve the restrictions that relieve restrictions on interstate 16 also issued under Sec. 203, Title II, Pub.
movement of regulated articles from that L. 106–224, 114 Stat. 400 (7 U.S.C. 1421
were no longer needed to prevent the
area. note).
spread of Mediterranean fruit fly to
noninfested areas of the United States. The entities most likely to be affected Done in Washington, DC, this 1st day of
As a result of the interim rule, there are are fruit sellers, nurseries, growers, November 2002.
no longer any areas in the continental packinghouses, certified farmers Peter Fernandez,
United States quarantined because of markets, and swapmeets. The area that Acting Administrator, Animal and Plant
the Mediterranean fruit fly. we removed from the list of quarantined Health Inspection Service.
areas is a predominantly residential area [FR Doc. 02–28348 Filed 11–6–02; 8:45 am]
EFFECTIVE DATE: The interim rule
with many apartment buildings.
became effective on June 27, 2002. BILLING CODE 3410–34–P
Available information indicates that
FOR FURTHER INFORMATION CONTACT: Mr. there are no entities in the area that sell,
Stephen A Knight, Senior Staff Officer, process, handle, or move regulated
PPQ, APHIS, 4700 River Road Unit 134, FEDERAL RESERVE SYSTEM
articles interstate.
Riverdale, MD 20737–1236; (301) 734– In the interim rule, we solicited 12 CFR Parts 201 and 204
8247. comments, particularly those pertaining
SUPPLEMENTARY INFORMATION: to the number and kind of small entities [Regulations A and D; Docket Nos. R–1123
and R–1134]
Background that may incur benefits or costs as a
result of the action. We received no Extensions of Credit by Federal
The Mediterranean fruit fly (Medfly) comments. Reserve Banks; Reserve Requirements
regulations contained in 7 CFR 301.78 We therefore expect the effect of the of Depository Institutions
through 301.78–10 (referred to below as interim rule on any affected entities
the regulations) restrict the interstate should be minimally positive, as they AGENCY: Board of Governors of the
movement of regulated articles from will no longer be required to treat Federal Reserve System.
quarantined areas to prevent the spread regulated articles to be moved interstate ACTION: Final rule; technical
of Medfly to noninfested areas of the for Medfly. amendment.
United States. For this reason, the termination of the
In an interim rule effective June 27, quarantine on that portion of Los SUMMARY: The Board of Governors is
2002, and published in the Federal Angeles County, CA, should have only publishing final amendments to

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67778 Federal Register / Vol. 67, No. 216 / Thursday, November 7, 2002 / Rules and Regulations

Regulation A that replace the existing adjustment credit. The regulation also consistent with the institution’s timely
adjustment and extended credit prohibits the use of discount window return to a reliance on market funds. A
programs with programs called primary credit to finance the sale of federal Reserve Bank also could extend
and secondary credit and also funds. Because of these restrictions, a secondary credit to facilitate the
reorganize and streamline existing Reserve Bank must evaluate the resolution of serious financial
provisions of Regulation A. The final financial situation of each borrower to difficulties of an institution. The Board
rule leaves the existing seasonal credit determine that both the reason for proposed that the initial rate be set by
program essentially unchanged. The borrowing at the discount window and formula 50 basis points above the
final rule is intended to improve the the depository institution’s use of primary credit rate. The Board’s
functioning of the discount window and borrowed funds are appropriate. proposal contemplated that the
does not indicate a change in the stance Reserve Bank administration of secondary credit program would require
of monetary policy. adjustment credit tends to create more Reserve Bank administration than
The Board also is amending the uncertainty among depository the primary credit program.
penalty provision of Regulation D, institutions about their access to The proposed regulation retained the
which is calculated based on the discount window credit. In addition, existing seasonal credit program
discount rate, to conform the calculation institutions that have borrowed at the without substantive change, although
of penalties for reserve deficiencies to discount window after advertising their the Board specifically requested
the new discount rate framework. need for funds in the market have comment regarding whether that
DATES: This final rule will become expressed concern that borrowing at the program was still necessary and, if so,
effective on January 9, 2003. window signals weakness and is a what the applicable interest rate should
FOR FURTHER INFORMATION CONTACT: source of stigma. Concerns such as these be.
Brian Madigan, Deputy Director (202/ in some cases have deterred depository
Overview of Comments Received
452–3828) or William Nelson, Senior institutions from borrowing at the
Economist (202/452–3579), Division of discount window during very tight The Board received 61 comments on
Monetary Affairs; or Stephanie Martin, money markets when doing so would the proposed rule from depository
Assistant General Counsel (202/452– have been appropriate. This in turn has institutions of various sizes, trade
3198) or Adrianne Threatt, Counsel hampered the ability of the discount associations that represent depository
(202/452–3554), Legal Division; for window to buffer shocks to the money institutions, individuals, and Reserve
users of Telecommunication Devices for markets. Banks. This section presents an
the Deaf (TDD) only, contact 202/263– To improve the operation of the overview of the main points contained
4869. discount window, the Board proposed in the comments received. The section-
to replace the existing adjustment and by-section analysis of the final rule, set
SUPPLEMENTARY INFORMATION:
extended credit programs with primary forth below, discusses the comments in
Background and secondary credit programs (67 FR greater detail and responds to the major
36544, May 24, 2002). The Board concerns expressed by commenters.
Existing Regulation A and the Board’s
proposed that primary credit be Support for the Proposal
Proposed Rule
available to generally sound institutions
Under existing Regulation A, three on a very short-term basis, usually Of the 30 letters that addressed the
credit programs are available to overnight, with little or no primary and secondary credit programs,
depository institutions: (1) Adjustment administrative burden on the borrower approximately 14 generally supported
credit, which is available for short and that borrowers of primary credit not moving to an above-market discount
periods of time, usually overnight, when be required to exhaust other sources of window framework. These commenters
a depository institution has exhausted funds before obtaining short-term indicated that replacing the existing
other sources of funds; (2) extended primary credit. The Board also proposed below-market discount window facility
credit, which is available for somewhat that primary credit be available for with an above-market framework would
longer periods when assistance is not periods of up to a few weeks to provide more easily accessible funding
available from other sources; and (3) generally sound institutions that cannot on more predictable and transparent
seasonal credit, which is available reasonably obtain such funding in the terms with less burden on borrowers
largely to small banks with a market. The Board proposed no and would remove incentives to borrow
pronounced seasonal funding need. restrictions on the purposes for which in order to exploit interest rate spreads.
Over the past decade, the interest rate the borrower could use primary credit. Owing to the removal of the
on adjustment credit has been 25 to 50 The proposal contemplated that Reserve requirements that a borrower exhaust
basis points below the federal funds Banks would establish a System-wide other funding sources and prove its
rate, which is the rate that applies to set of criteria, based on supervisory and need for credit and the addition of the
uncollateralized overnight loans in the other relevant information, which requirement that primary credit
interbank market. The rates for extended would be used to determine whether an borrowers be in generally sound
and seasonal credit are set by formulas institution was in generally sound financial condition, some supporters of
based on market interest rates and financial condition and thus eligible for the proposal thought that the stigma
typically have been at or above the basic primary credit. The Board proposed that associated with discount borrowing
discount rate. primary credit normally be available at would decrease. Commenters also
The below-market rate for adjustment a rate above the target federal funds rate indicated that an above-market
credit creates incentives for an of the Federal Open Market Committee framework would provide depository
institution to borrow at the discount (FOMC) and that the initial primary institutions with an incentive to manage
window to exploit the spread between credit rate be 100 basis points above the their liquidity more prudently under
the discount rate and the higher market target federal funds rate. normal market conditions in order to
rate for short-term funds. The current Under the proposed rule, institutions avoid paying the penalty rate but would
regulation therefore requires that an not eligible for primary credit would be make it easier for banks to obtain
institution first exhaust other available permitted to borrow secondary credit to overnight funding during periods of
sources of funds and explain its need for meet temporary funding needs, very tight money markets. Supporters

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Federal Register / Vol. 67, No. 216 / Thursday, November 7, 2002 / Rules and Regulations 67779

also stated that an above-market lending Many commenters expressed concern comments are discussed in detail below
facility would be more akin to the that the proposal either would not in the section on seasonal credit.
lending facilities of other central banks. address or would exacerbate the Summary of Final Rule
problems that the Board identified as
Questions About the Need for Proposed For the reasons discussed in detail
reasons for changing to an above-market
Changes below in the section-by-section analysis,
framework. Although some critics of the
Some commenters questioned the proposal thought that the new the Board’s final amendments to
underlying reasons the Board gave for framework would prevent extreme Regulation A substantively are nearly
proposing an above-market framework. spikes in the federal funds rate, many identical to the rule the Board proposed
Several commenters questioned the commenters thought that volatility, in May 2002. Most notably, the final
Board’s statement that some depository especially intraday volatility, would rule replaces the existing adjustment
institutions were deterred from coming increase rather than decrease. Other and extended credit programs with
to the discount window because of commenters thought that depository primary and secondary credit programs,
perceptions that discount window institutions would be at least as and the Reserve Banks will offer these
borrowing indicated financial weakness. reluctant as they are currently to seek new types of credit at rates that exceed
One commenter asserted that, because discount window credit because stigma the FOMC’s target federal funds rate.
of limits on lending to undercapitalized would remain or because the above- The Board has included in the final rule
institutions, borrowing at the window market rate would deter borrowing. Still a section under which the primary
was more likely to indicate strength other commenters asserted that the credit rate could be lowered in a
than weakness, while others asserted Board’s proposal would not be less financial emergency in the absence of a
that market participants did not view burdensome for borrowers. Suggested quorum of the Board. The Board is
borrowing as an important factor when Alternatives to and Suggestions retaining the seasonal credit program
assessing financial strength.1 Still Regarding the Board’s Proposal. with only minor technical changes.
another commenter argued that the Some commenters who expressed Section-by-Section Analysis
current low volume of borrowing did general concern about the proposed
not indicate reluctance to borrow, but The Above-Market Lending
above-market structure suggested that Framework—§§ 201.4 and 201.51.
rather indicated that depository the Board modify or consider
institutions were using the window alternatives to its proposal. One The Above Market Framework
appropriately as a backup rather than commenter suggested that the problems Generally and Market Volatility
primary source of liquidity.2 Other with the current discount window A number of commenters argued that
commenters questioned the need for an programs were not burden and stigma, moving to an above-market discount
above-market rate for purposes of but rather were uncertainty about the window framework generally would
limiting volatility in the federal funds programs and inconsistent requirements increase volatility, especially in light of
market because they thought that the and expectations throughout the the proposed 100-basis-point initial
existing controls and incentives System. This commenter suggested spread of the primary credit rate over
adequately limited volatility. leaving the current discount window the target federal funds rate, and
Concerns About the Proposal programs in place but clarifying the therefore would not accomplish one of
Reserve Banks’ credit policies, the Board’s stated goals.6
Sixteen commenters, eight of whom It is possible that certain measures of
expectations, and requirements and
opposed the proposal, expressed various volatility of the federal funds rate—
applying those criteria more
concerns about the proposal. particularly those that give some weight
consistently throughout the Federal
Commenters’ concerns focused mainly to small deviations from the target, such
Reserve System.4 Another commenter
on the proposed 100-basis-point spread as the intraday standard deviation of the
proposed that the Board try to cap the
between the target federal funds and federal funds rate—will increase under
federal funds rate through late-day open
primary credit rates. Other commenters the above-market framework. However,
market operations rather than change its
expressed concern that lending funds at the Board believes that an above-market
credit programs. Other commenters
an above-market rate inappropriately framework will reduce the potential for
thought that the Federal Reserve should
would introduce a profit motive into more extreme, unintended movements
make credit available continuously and
actions related to monetary policy, in the funds rate. These extreme
at market rates.5 Comments Regarding
thereby creating a conflict of interest for movements arguably are more
Seasonal Credit.
the Federal Reserve System.3 problematic than smaller ones because
Over half the comments the Board they tend to occur in the context of, and
1 One commenter argued that the manner in received were in response to the Board’s can exacerbate, conditions of market
which discount window borrowing is reported solicitation for comment about the stress. Most depository institutions will
makes it difficult to identify individual borrowers. continued need for the seasonal credit
Others thought that discount window activity was not have an incentive to borrow from
at best a secondary indicator of financial strength program. Forty-five commenters the window until the federal funds rate
because market participants rely on other sources addressed the seasonal credit program, rises to the primary credit rate, at which
when determining an institution’s soundness. with 39 in favor of retaining and six in point institutions likely will view the
2 The Board believes that a number of factors,
favor of eliminating the program. These window as an attractive alternative. The
including improved account management by
depository institutions, contribute to the relatively presence of the discount window as a
low level of borrowing at recent spreads of the funds obtained through the primary credit program, funding option should ensure that the
federal funds rate over the discount rate. However, the public might blame the Federal Reserve.
the Board also believes that the current framework 4 The Board notes that the Federal Reserve
federal funds rate will not rise
of below-market lending, with its attendant need to System has taken steps over the past decade that significantly above the primary credit
administer lending heavily, remains a potential have been intended to clarify requirements and
deterrent to appropriate borrowing, especially decrease stigma. 6 These commenters generally thought that an
during periods when the overall condition of the 5 The Board notes that this approach would be above-market structure would allow sellers
financial sector is weak. inconsistent with operation of primary and routinely to increase the federal funds rate all the
3 Another commenter argued that if a depository secondary credit facilities as backup sources of way up to the ceiling established by the discount
institution were to deteriorate as a result of reselling liquidity and reserves for depository institutions. rate, thereby increasing the cost of funds generally.

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67780 Federal Register / Vol. 67, No. 216 / Thursday, November 7, 2002 / Rules and Regulations

rate, so the primary credit rate intended purpose of a central bank to as many as 50 basis points would be
effectively will serve as a cap on and lending facility, rather than as a routine preferable to the 100-basis-point initial
limit potential volatility in the federal one. Reserve Banks will extend primary spread the Board proposed.7 Other
funds rate. credit on an overnight basis with commenters suggested alternative
Some commenters stated that an minimal administrative requirements, mechanisms for setting the rate, such as
above-market discount window unless an aspect of the request for funds setting the rate at a certain percentage,
framework would place an upper limit suggests that the credit extension would rather than a certain number of basis
on the federal funds rate but argued that not meet the conditions of primary points, above the target federal funds
the Board should not establish a ceiling credit. Reserve Banks also may extend rate.8
on the federal funds rate without also primary credit to eligible institutions for The Board notes that an appreciable
establishing a floor, noting that net periods of up to several weeks if such spread between the primary credit and
sellers of federal funds are funding is not available from other target federal funds rate is necessary for
disadvantaged by declines in the federal sources. However, longer-term the success of the above-market
funds rate. The most effective means of extensions of primary credit will be discount window programs. Given the
establishing a floor would be for the subject to greater administration than large number of financial institutions in
Federal Reserve to pay interest on are overnight loans. The text of the United States and the tremendous
excess reserve account balances, § 201.4(a) is essentially the same as that variation in their sizes and other
because a depository institution would of the Board’s proposal, although the characteristics, the availability and price
have no incentive to lend or sell final rule includes language highlighting of market funding sources available to
reserves at a lower rate than the rate of the backup nature of the primary credit U.S. financial institutions also vary
interest those reserve balances could facility. widely. If the primary credit rate were
earn. However, the Federal Reserve does not at least as high as the highest rate
not have explicit statutory authority to 1. Interest Rates for Primary Credit on sources of comparable funding in the
pay interest on reserve balances at this Several commenters supported the market, then some depository
time. Board’s proposal that the initial primary institutions frequently would find the
Although it might be desirable to limit credit rate be 100 basis points above the primary credit program, rather than the
both upward and downward volatility, target federal funds rate. These open market, to be the most attractive
those limits need not be implemented commenters thought that a 100-basis- source of funds. If routine use of the
simultaneously in order to produce point spread generally was appropriate window occurred, the Federal Reserve
beneficial results. The potential and would encourage most financial still would need to administer the
advantages of the proposed discount institutions first to seek credit discount window heavily to deter
window changes are considerable even elsewhere. One commenter thought the institutions from making undue use of
in the absence of a rate floor, and proposed spread was acceptable because primary credit.
delaying implementation of the above- the Federal Reserve does a good job of Although it is difficult to determine
market framework would unnecessarily keeping the federal funds rate near the the appropriate rate at which to extend
defer those advantages without any target. primary credit to ensure that it remains
countervailing benefit. The Board The Board received numerous a backup funding source, empirical
therefore has determined that comments, however, that expressed evidence from several sources suggests
implementation of the above-market specific concern about the proposed that 100 points above the target federal
framework should proceed without initial primary credit rate. Many funds rate is an appropriate initial rate.
delay. commenters, even those that generally These data cast doubt on whether a
supported the proposal, argued that the lesser spread would accomplish this
Primary Credit 100-basis-point spread the Board goal of ensuring that the discount
Reserve Banks will extend primary proposed was too wide and would window remains a backup source of
credit at a rate above the target federal undermine the Board’s articulated goals liquidity.
funds rate on a very short-term basis for the primary credit program. These Experience with the Special Liquidity
(typically overnight) to depository commenters thought that a discount rate Facility (SLF) that the Federal Reserve
institutions that the Reserve Banks of the target federal rate plus 100 basis System established to address unusual
judge to be in generally sound financial points was too high because it was liquidity strains that arose during the
condition. Reserve Banks will determine overly punitive, would deter months surrounding the date change on
eligibility for primary credit according institutions from borrowing at the January 1, 2000, is instructive. The SLF
to a set of criteria that is uniform discount window, and would allow was similar to the primary credit
throughout the Federal Reserve System sellers of federal funds to bid the federal program in many ways because
and based mainly on examination funds rate up during periods of limited
ratings and capitalization, although trading, low reserve volume, or late-day 7 Although most commenters who suggested a
supplementary information, including trading. Other commenters thought that particular rate did not explain their rationale, one
market-based information when a 100-basis-point spread between the commenter argued that a 50-basis-point spread
available, also could be used. An would be appropriate because the commenter
target federal funds and discount rates asserted that approximately half the large spikes in
institution that is eligible to receive would thwart the Board’s efforts to the federal funds rate were at about that level.
primary credit need not exhaust other remove the stigma associated with Another commenter indicated that a 50- to 60-basis-
sources of funds before coming to the discount window borrowing and to point spread would be appropriate because that
discount window, nor will it be would ensure that the central bank rate was slightly
encourage depository institutions and higher than the market rate but would keep the
prohibited from using primary credit to industry analysts to view the window as market rate from becoming excessive.
finance sales of federal funds. However, a normal liquidity source for sound 8 One of these commenters suggested that the

in view of the above-market price of institutions. amount of the spread should depend on the level
primary credit, the Board expects that a Several commenters liked the idea of of the target federal funds rate, such that the lower
the federal funds rate, the lower the spread and vice
depository institution will continue to setting the primary credit rate at rate versa. Another suggested tying the primary credit
use the discount window as a backup above the target federal funds rate but rate to the collateralized repo rate rather than the
source of liquidity, which is the suggested that a spread of as few as 25 federal funds rate.

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eligibility was limited to financially Because a change in the stance of Reserve only took supervisory ratings
sound institutions, administration of the monetary policy between now and the into account and did not allow
facility intentionally was quite limited, recommended initiation of the new supplementary information if a
and funding was available at a fixed programs on January 9, 2003, cannot be depository institutions were rated
spread of 150 basis points above the ruled out, it is uncertain at this point CAMELS 1 or 2.11 Another commenter
federal funds rate. Despite the penalty what level of the primary credit rate will suggested that institutions that are rated
rate, there were 42 instances in which correspond with a spread of 100 basis CAMELS 5 or that are critically
institutions borrowed from the SLF for points on that date. Section 201.51(a), undercapitalized either should be
a period of two to ten consecutive days which describes the primary credit rate, precluded from obtaining credit or
and 14 instances in which institutions therefore at this time simply will state should be charged a much higher
borrowed for periods of more than ten that the primary credit rate is a rate penalty rate than the Board proposed. In
consecutive days. This suggests that the above the target federal funds rate of the contrast, other commenters expressed
SLF was an attractive source of longer- FOMC. When the Reserve Banks concern that the proposed eligibility
term, rather than overnight, funding for establish and the Board determines the criteria relied too heavily on
some institutions despite the 150-basis- rate to be in effect on January 9, 2003, supervisory data. These commenters
point spread above market rates, which the Board will amend § 201.51(a) to expressed concern that reliance on an
in turn suggests that those financially indicate the initial primary credit rate institution’s soundness was not
sound institutions might not have had for each Reserve Bank. The Board’s appropriate in a system of secured
access to cheaper funding in the open amendment will be effective on January lending and suggested that the Federal
market. 9, 2003. Reserve instead should base its lending
In addition, Federal Reserve staff programs and credit decisions on the
conversations with representatives of 2. Eligibility Criteria
type of collateral an institution offers.
correspondent banks and other The Board proposed that eligibility for The Board believes that, in order to
depository institutions found that the primary credit be determined mainly by ensure uniformity of credit eligibility
overnight funding options for banks a depository institution’s supervisory throughout the Federal Reserve System,
without access to the national money ratings and capitalization, although the criteria must rely heavily on
markets were priced from 3⁄16 to 1 supplementary information, when objective supervisory data, which reflect
percentage point over the federal funds available, also could be used. Under the determinations made by an institution’s
rate, with the largest spread being Board’s proposed rule, institutions that primary regulator after an extensive
charged by an institution that preferred were rated CAMELS 1 or 2 or SOSA 1 review process. However, the Board also
that its customers first exhaust other and at least adequately capitalized recognizes that an institution could
sources of short-term funding. almost certainly would be eligible for experience significant changes in its
Moreover, a spread on the order of primary credit, while institutions rated financial strength between
100 basis points has been used by some, CAMELS 4 or 5 almost certainly would examinations, in which case the
but not all, foreign central banks on not be eligible. Institutions rated institution’s supervisory ratings might
their Lombard discount window CAMELS 3 or SOSA 2 that are at least not reflect its current soundness and
facilities. Perhaps most notably, the adequately capitalized might be eligible, creditworthiness. To protect the Reserve
European Central Bank generally has depending on supplementary Banks from the risks and to avoid the
employed a spread of 100 basis points. information.10 The Board noted that this allocative distortions that could be
Conversations with staff of some of recommendation aligned very closely involved in lending to such an
these central banks indicate that the with the categorization of institutions institution, the Board believes that the
experience with spreads of this size for purposes of determining access to eligibility criteria must allow for the use
generally has been positive and has daylight credit. of some amount of supplementary
been consistent with achieving those Several commenters specifically information, including market-based
central banks’ goals. addressed the eligibility criteria for information when available, to confirm
In view of the foregoing evidence, the primary credit. Most of these that an institution’s most recent
Board believes that an initial spread of commenters thought that the proposed supervisory data accurately reflect the
100 basis points is appropriate and criteria generally were appropriate, institution’s current condition.
anticipates that a primary credit rate although some suggested changes. Under the final rule, the Board
consistent with such a spread will be Several commenters argued that the anticipates that the Reserve Banks will
established as of January 9, 2003. The criteria should rely more heavily on initially adopt criteria that are
Board notes, however, that this is only examination ratings and minimize substantially similar to those articulated
the initial rate. The Reserve Banks are reliance on other types of information in in the Board’s proposal with some
required to establish the primary credit determining eligibility for primary additional elements that will make the
rate, subject to the review and credit. One commenter thought that the eligibility criteria identical to those for
determination of the Board, at least guidelines would be more clear, daylight credit. The classification
every two weeks or more often if the concise, and uniform if the Federal scheme used by Reserve Banks for
Board deems necessary. The System determining access to daylight credit is
therefore can set a primary credit rate at spread above the federal funds rate or by using any well developed and provides a good
a lesser, or greater, spread above the other formula. Rather, the Reserve Banks will measure of the general soundness of
federal funds rate as needed in light of establish the actual primary credit rate, subject to depository institutions. Reserve Banks
the review and determination of the Board.
actual experience with the primary 10 CAMELS (Capital, Assets, Management,
and depository institutions already have
credit program.9 Earnings, Liquidity, and Sensitivity to market risk) extensive experience with these criteria,
ratings, applicable to domestically chartered
9 One commenter expressed concern that the institutions, are set on a scale of 1 through 5, with 11 This commenter argued that the other

Reserve Banks would establish and the Board 5 representing the highest degree of supervisory information the Board proposed to take into
determine the spread between the federal funds and concern. SOSA (Strength of Support Assessment) account was irrelevant to a Reserve Bank’s risk
primary credit rates, rather than setting the actual ratings, applicable to foreign banking organizations, regarding secured overnight loans and that
rate. The Board notes that the primary credit rate are set on a scale of 1 through 3, with 3 indicating considering such information would lead to
will not be determined by establishing a fixed the highest degree of supervisory concern. uncertainty about borrowing privileges.

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67782 Federal Register / Vol. 67, No. 216 / Thursday, November 7, 2002 / Rules and Regulations

and using them to determine eligibility The Board believes that the Federal funds. Longer-term secondary credit
for both the daylight credit and primary Reserve can reasonably expect to would be available if necessary for the
credit programs generally should be achieve, over time, some reduction in orderly resolution of a troubled
straightforward for the Reserve Banks stigma as a result of the primary credit institution, although any such loan
and should be more transparent for program. Only generally sound would have to comply with the
borrowers. Using a single set of criteria institutions will be eligible to borrow limitations of § 201.5 regarding lending
for both programs also should simplify primary credit, and the Board expects to undercapitalized and critically
explanations of Reserve Bank credit that most institutions will be eligible for undercapitalized institutions. Unlike
programs to depository institutions and primary credit. Market participants the primary credit program, secondary
the public. would have no reasonable basis for credit will not be a minimal
Under the criteria that would be inferring that an institution believed to administration facility because the
applied at the outset of the program, have borrowed primary credit was Reserve Banks will need to obtain
institutions’ eligibility would be based unsound.14 Also, with credit no longer sufficient information about a
on CAMELS (or SOSA and ROCA) offered at a subsidy rate, the Federal borrower’s financial situation to ensure
ratings, capitalization, and, at the Reserve will no longer require a that an extension of credit complies
Reserve Bank’s discretion, borrowing institution first to exhaust with the conditions of the program. The
supplementary information.12 More other funding sources. As a result, description of secondary credit at
specifically, institutions that are at least borrowers will not have to make their § 201.4(b) closely tracks the language of
adequately capitalized and rated funding needs known to the market, the Board’s proposed rule but states that
CAMELS 1 or 2 (or SOSA 1 and ROCA which should eliminate a key source of short-term secondary credit is a backup
1, 2, or 3) would almost certainly be stigma cited by depository institutions. funding source.
eligible for primary credit. Institutions Depository institutions and persons The rate for secondary credit will be
that are at least adequately capitalized attempting to assess the strength of set by formula and will be above the
and rated CAMELS 3 (or SOSA 2 and those institutions also should have no primary credit rate. Initially, the spread
ROCA 1, 2, or 3) generally would be concerns that financial regulators will between the primary and secondary
eligible. Institutions that are at least view occasional use of primary credit as credit rates will be 50 basis points.15
adequately capitalized and rated a potential indication of difficulties. In Less sound borrowers are riskier and
CAMELS 4 (or SOSA 1 or 2 and ROCA addition, the borrowings of those might have an incentive to use discount
4 or 5) would be eligible only if an institutions that are believed to be window borrowings to expand their
ongoing examination indicated a lending the proceeds of discount balance sheets in a manner that likely
substantial improvement in condition. window credit into the federal funds would distort resource allocation, and
Institutions that are not at least market clearly will indicate nothing the higher rate on secondary credit is
adequately capitalized, or that are rated adverse about their financial condition. designed to reduce this incentive. Even
CAMELS 5 (or SOSA 3 regardless of the Finally, reflecting the incentives created with the higher rate, some institutions
ROCA rating), would not be eligible for by an above-market framework, a might tend to rely routinely on
daylight or primary credit. significant proportion of primary credit secondary credit, so administration of
In summary, eligibility for primary borrowing is likely to occur when the secondary credit remains necessary. If
credit will be restricted to institutions overall money market has tightened experience eventually suggests that a
that are in generally sound financial significantly. Because occasions of 50-basis-point spread above the primary
condition. The Reserve Banks will be tightening markets are well known to all credit rate is either too high or too low
responsible for determining the general money market participants and analysts, to achieve the objectives of the
soundness of the institutions in their it will be easy for them to recognize that secondary credit program, the Federal
districts. At the outset of the program, borrowing at such times reflects a Reserve could adopt a different formula.
the Reserve Banks will use the criteria general market situation rather than Seasonal Credit
that are already used for determining conditions particular to a single
eligibility for daylight credit. The Board’s proposed rule left the
institution. seasonal credit intact with two technical
3. Reduction of Burden and Stigma Secondary Credit revisions. The Board proposed removing
Some commenters disagreed that the the requirement that a potential
The Reserve Banks will offer
proposed revisions would reduce the borrower first demonstrate that it has
secondary credit to institutions that do
stigma of borrowing at the discount exhausted special industry lenders as a
not qualify for primary credit. As with
window and in particular noted that funding source, because in practice the
primary credit, secondary credit will be
analysts and counterparties might infer Reserve Banks have not used this
available as a backup source of liquidity
that the bank could not obtain funds at criterion for some time. In addition, the
on a very short-term basis, provided that
market rates and therefore might be in Board proposed eliminating the
the loan is consistent with a timely
financial difficulty if there were requirement that the seasonal credit rate
return to a reliance on market sources of
evidence that the bank were paying a
15 Although the Board received few comments
premium for funds. 13 education campaign by the Federal Reserve targeted specifically about the secondary credit program,
at those whose opinions influence perception of the those commenters that did reference the program
12 ROCA (Risk management, Operation controls, discount window would achieve this result. Other generally thought that the proposed rate of 50 basis
Compliance, and Asset quality) ratings apply to the commenters thought that financially sound points above the primary credit rate was
U.S. operations of a foreign banking organization. institutions would not borrow at the window appropriate. However, one commenter suggested
They are set on a scale of 1 to 5; as with CAMELS because the market would not be able to tell that a higher secondary credit rate should not
ratings, higher numbers indicate increased whether they obtained primary or secondary credit. reflect a risk premium, because all secondary credit
supervisory concern. 14 Although the Federal Reserve System does not
would be collateralized fully. This commenter
13 Several commenters thought that stigma would publish information on individual banks’ use of the suggested that the higher rate was justified only by
remain until senior bank management, equity discount window, it is required by law to publish its ‘‘incentive effect.’’ Presumably this commenter
analysts, investors, rating agencies, and other a weekly balance sheet for each Reserve Bank. The was referring to the incentive a higher rate provides
market participants consider the discount window Federal Reserve also publishes weekly data on the to less-sound institutions not to use discount
to be a ‘‘normal’’ source of liquidity. Some of these aggregate amount the Federal Reserve System has window funding to expand their balance sheets
commenters suggested that only an intensive lent under each discount window program. inappropriately.

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be at or above the basic discount rate, commenters with FHLB access stated provides that the primary credit rate is
because that requirement would not be that FHLB loans are for longer terms reduced to the FOMC’s target federal
consistent with the pricing of primary than needed to meet seasonal demand. funds rate if in a financial emergency a
credit. The Board specifically solicited Although many small banks indicated Reserve Bank has requested that the
comment on whether the seasonal credit that their deposits generally have primary credit rate be established at the
program is still needed and, if so, increased because of the recent decline target federal funds rate and the
whether the current formula for in the equity markets, they expected Chairman of the Board (or, in the
determining the rate remains that the availability of deposit funding absence of the Chairman, his designee)
appropriate. The majority of the would decrease as other investment certifies at the time of the financial
comments that the Board received options became more attractive. Some emergency that a quorum of the Board
responded to this request. depository institutions also stated that is not available. If the primary credit
Six commenters favored eliminating obtaining liquidity by competing for rate were lowered as a result of this
the seasonal credit program, arguing additional deposits either was too provision, the primary credit rate then
that small banks with seasonal needs expensive or was impossible because of would float with the target federal funds
had adequate access to other sources of a lack of core deposits in the rate, which the FOMC would continue
liquidity and that the seasonal credit community. to set. This provision of Regulation A
program was unnecessary. These Several commenters indicated that implements the Board’s decision that
commenters thought that the proposed eliminating the seasonal credit program lowering the primary credit rate to the
primary and secondary credit programs would be harmful in other ways. Many target federal funds rate in a financial
could meet the needs of small banks. institutions expressed concern that, emergency is the appropriate course of
One commenter indicated that, if the without that program, the FHLBs would action. The Federal Reserve Banks are
Board kept the seasonal credit program, become their only viable alternative establishing analogous internal
it should be available only to banks with liquidity source and that they would be procedures to address the possibility
less than $100 million in assets. overly exposed to the FHLBs. Other that their boards of directors or other
The Board received 39 comments depository institutions argued that if duly authorized officials might be
from depository institutions, trade they could not obtain funding on terms unavailable or otherwise unable to
associations that represent small banks, comparable with those of the seasonal communicate a rate request to the Board
and a Federal Reserve Bank urging the credit program, they in turn would not in a timely manner during a financial
Board to retain the seasonal credit be able to compete effectively with other emergency.
program, and most of these commenters lenders, including the Farm Credit
also recommended retaining the existing System, for agricultural loans. Reorganization of and Changes to Other
rate formula.16 The depository Section 201.4(c) of the final rule Provisions of Regulation A
institutions argued that they continue to leaves the seasonal credit unchanged,
Section 201.1 Authority, Purpose and
experience seasonal demand for which except for technical revisions contained
Scope
they have relatively few alternative in the Board’s proposal.
The Board’s final rule amends this
funding sources. Some commenters Lowering the Primary Credit Rate in a section to include as sources of
indicated that they have no or very Financial Emergency authority sections 11(i)–11(j) and 14(d)
limited access to short-term capital
In a financial emergency, lowering the of the Federal Reserve Act, which
markets and national money markets or discount rate would help to prevent an respectively provide the Board with
that they can obtain credit through these undue tightening of money markets, rulemaking authority and general
channels only on unfavorable terms. even if the Federal Reserve’s ability to supervisory authority over the Reserve
Some small banks stated that they did provide reserves through open market Banks and authorize the Reserve Banks,
not have access to the Federal Home operations were constrained by the subject to the review and determination
Loan Banks (FHLBs), and some timing or effects of the conditions giving of the Board, to establish discount rates.
16 Commenters offered various suggestions
rise to the financial emergency. This section also gathers all existing
regarding the seasonal credit program. Some Especially in light of the events of provisions concerning the scope of
thought that the seasonal credit rate should be even September 11, 2001, when the System Regulation A into one section by
lower than the existing rate formula provides, and needed to make monetary policy and incorporating language from existing
one asked that the Reserve Banks offer borrowers lending decisions quickly, the Board
a choice of fixed or variable rates. Another
§ 201.7(a) regarding the circumstances
commenter opined that the Reserve Banks should believes that it is desirable to ensure under which U.S. branches and agencies
accept a broader range of assets as collateral, that the primary credit rate is lowered of foreign banks are subject to the
consider a ‘‘blanket pledging agreement’’ such as expeditiously in response to a financial regulation.
that used by the FHLBs, and stop demanding to take emergency.
physical possession of the collateral. (The Board
Section 201.51(d)(2) of the Board’s Section 201.2 Definitions
notes that in fact only a small fraction of collateral
is held physically by the Reserve Banks. Most rule defines a financial emergency as a This section remains unchanged
collateral is held by the pledging institution or significant disruption to the U.S. money except for the deletion of five
pledged electronically.) One commenter suggested markets resulting from an act of war, definitions. The definition of ‘‘eligible
that Reserve Banks should allow depository
institutions to borrow up to the entire amount of
military or terrorist attack, natural institution’’ (existing § 201.2(j)) is
the assets they pledge as collateral (in other words, disaster, or other catastrophic event. unnecessary because it related only to
with no ‘‘haircut’’). Some commenters indicated Ideally, a quorum of the Board would be the SLF that was established for use
that the Federal Reserve should not require banks present to review and determine the during the months surrounding the
to demonstrate that their seasonal needs were for
four consecutive weeks and should not vary an
primary credit rate at the time a January 1, 2000, date change. The
institution’s seasonal credit line from month to financial emergency occurred. However, definition of ‘‘targeted federal funds
month. Other commenters suggested that the to ensure that the Board’s determination rate’’ (existing § 201.2(k)) also originally
Federal Reserve simplify both the eligibility criteria to lower the rate in response to a was used only in connection with the
and the information requirements in connection
with seasonal credit and requested that the Reserve
financial emergency could take effect SLF. Although the new emergency rate
Banks do more to promote awareness of the even in the absence of a quorum, procedure provision also refers to the
seasonal credit program. § 201.51(d) of the Board’s final rule target federal funds rate, that provision

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67784 Federal Register / Vol. 67, No. 216 / Thursday, November 7, 2002 / Rules and Regulations

explains precisely what the term means. section 19 of the Federal Reserve Act provides that a depository institution
The Board therefore believes that there and Regulation D. The Board previously may not use Federal Reserve credit as a
is no need to define the term ‘‘targeted has allowed Reserve Banks to grant substitute for capital, because the Board
federal funds rate’’ in the definition discount window access to a bankers’ believes that other provisions of the
section. bank that voluntarily maintain reserves, statutes and regulations that it
The Board also is deleting the terms and the Board expects that practice to administers adequately address this
‘‘liquidation loss,’’ ‘‘increased loss,’’ and continue under this final rule. issue. Section 201.5 Limitations on
‘‘excess loss,’’ (existing § 201.2(d)–(f), Availability and Assessments.
respectively). Liquidation loss and Section 201.3 General Requirements This section is unchanged from the
increased loss are used to derive the Governing Extensions of Credit proposed rule and describes the
term excess loss, which is the amount The Board is adopting § 201.3 as it limitations on advances to an
the Board would owe the Federal appeared in the proposed rule. This undercapitalized or critically
Deposit Insurance Corporation (FDIC) section prescribes the Board’s general undercapitalized depository institution
under section 10B(b) of the Federal rules governing a Federal Reserve set forth in section 10B(b) of the Federal
Reserve Act if outstanding Reserve Bank Bank’s extension of credit and combines Reserve Act and also applies those
advances to a critically undercapitalized in one place all the existing provisions limitations to discounts for such
depository institution increased the of Regulation A that relate to the institutions. In addition, § 201.5
FDIC’s cost of liquidating that Reserve Bank’s authority to extend discusses section 10B(b)’s requirement
institution. Since the enactment of credit, how credit is extended, and the that the Board pay a specified amount
section 10B(b) in 1991, section 10B(b)’s requirements that apply to extensions of to the FDIC if a Reserve Bank advance
payment provision has not been used. credit. This section states that credit to to a critically undercapitalized
The Board continues to believe that the depository institutions generally will depository institution increases the loss
three definitions describe accurately take the form of an advance but the FDIC incurs when liquidating that
and in detail the calculations required preserves a Reserve Bank’s discretion to institution. The existing regulation
by section 10B(b) and, should it become lend through discounting eligible paper explains in detail through the
necessary in the future, the Board would if the Reserve Bank determines that a definitions of ‘‘liquidation loss,’’
calculate the amount that it owed to the discount would be more appropriate for ‘‘increased loss,’’ and ‘‘excess loss’’ how
FDIC in accordance with the methods a particular depository institution. the Board would calculate that amount.
described in these three definitions. Section 201.3 cross-references the As discussed above, the proposed rule
However, because the definitions only Reserve Banks’ authority under section would delete these three definitions and
describe what the statute already 13A of the Federal Reserve Act to lend simply provide that the Board will
requires, the Board believes that the to an institution that is part of the farm assess the Federal Reserve Banks for any
regulation would be less cumbersome credit system, and accordingly the amount the Board pays to the FDIC in
but no less accurate if § 201.5 of the Board is deleting existing § 201.8 that accordance with section 10B(b) of the
final rule (regarding lending to deals with that topic. Federal Reserve Act.
undercapitalized and critically Section 201.3 preserves existing text
of Regulation A stating that a Reserve Technical Amendment to Regulation D
undercapitalized institutions) simply
cross-referenced section 10B(b) of the Bank has no obligation to make, In connection with its amendments to
Federal Reserve Act. increase, renew, or extend any advance Regulation A, the Board is adopting a
One commenter suggested that the or discount to a depository institution, conforming amendment to § 204.7 of
Board amend its definition of and that any extension of credit the Regulation D. This section currently
‘‘depository institution’’ to include Reserve Bank chooses to make must be provides that the penalty charge for
bankers’’ banks, which specifically are secured to the satisfaction of the Reserve reserve deficiencies shall be 2
excluded from the definition under Bank. The collateral policies of the percentage points per year above the
existing Regulation A. The Board Reserve Banks, as described in the lowest rate (generally the adjustment
previously has determined that the Reserve Banks’ Operating Circular No. credit rate) in effect for borrowings from
discount window is an appropriate 8, will remain unchanged. Section 201.3 the Federal Reserve Bank. In the recent
source of liquidity for depository contains existing text from § 201.4(d) past, the adjustment credit rate has
institutions that are subject to reserve providing that a Reserve Bank should consistently been set 50 basis points
requirements, and the definition of the ascertain whether an institution is below the target federal funds rate, and
term ‘‘depository institution’’ in undercapitalized or critically the reserve deficiency charge therefore
Regulation A therefore is based on the undercapitalized before extending credit has been 150 basis points above the
provisions in section 19 of the Federal to that institution and includes new text target federal funds rate.
Reserve Act and in the Board’s stating that if a Reserve Bank extends The amendment to § 204.7 will base
Regulation D regarding those credit to such an institution then the the charges for reserve deficiencies on
institutions that must maintain reserves. Reserve Bank must follow special the new primary credit rate in
Those provisions specifically exempt lending procedures. Regulation A and will authorize the
bankers’ banks from maintaining Regarding the rules that apply to a Reserve Banks to assess charges for
reserves, and because bankers’ banks borrower’s use of central bank credit, reserve deficiencies at a rate of 1
generally avail themselves of that § 201.3(d) contains new language that percentage point above the average
exemption the Board continues to explicitly permits an institution that primary credit rate. Under the revised
believe that bankers’ banks also receives primary credit to use that credit formula, when the primary credit rate is
generally should not have access to the to fund sales of federal funds without 100 basis points above the target federal
discount window. The Board therefore Reserve Bank permission. Recipients of funds rate the reserve deficiency charge
is not changing its definition of secondary or seasonal credit would will be 200 basis points above the target
‘‘depository institution’’ for purposes of continue to need Reserve Bank federal funds rate. The conforming
Regulation A. However, the Board notes permission to use Reserve Bank credit to amendment will maintain approximate
that bankers’ banks are free to choose to fund sales of federal funds. The Board uniformity between the current and new
be subject to the reserve requirements of is deleting existing § 201.6(a), which levels of the deficiency charge.

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Federal Register / Vol. 67, No. 216 / Thursday, November 7, 2002 / Rules and Regulations 67785

The Board does not believe the slight depository institutions received subject to reserve requirements under
difference between the current and new adjustment credit, none received Regulation D (12 CFR part 204) in the
deficiency charge formulas is significant extended credit, and approximately 156 same manner and to the same extent as
given the infrequency of reserve received seasonal credit.17 Although the this part applies to depository
deficiency charges, the ability of the Board solicited comment on the impact institutions. The Federal Reserve
Reserve Banks to waive the charges that the proposed rule would have on System extends credit with due regard
under certain circumstances, and the small depository institutions, no to the basic objectives of monetary
future potential for variations in the commenters specifically addressed that policy and the maintenance of a sound
spread between the target federal funds subject. However, the Board anticipates and orderly financial system.
rate and the primary credit rate. that the few small depository
institutions that make use of the existing § 201.2 Definitions.
Administrative Procedure Act For purposes of this part, the
discount window programs will find the
The provisions of 5 U.S.C. 553(b), new programs to be comparatively more following definitions shall apply:
relating to notice and public accessible and less burdensome, which (a) Appropriate federal banking
participation, were not followed in should enable more efficient use of the agency has the same meaning as in
connection with the adoption of the discount window. section 3 of the Federal Deposit
technical amendment to Regulation D Insurance Act (FDI Act) (12 U.S.C.
because this change merely adjusts the Paperwork Reduction Act 1813(q)).
penalty charged for reserve deficiencies In accordance with the Paperwork (b) Critically undercapitalized insured
to conform with the amended borrowing Reduction Act of 1995 (44 U.S.C. 3506; depository institution means any
rates of Regulation A, while 5 CFR 1320 Appendix A.1), the Board insured depository institution as
approximating the current level of the has reviewed the final rule under the defined in section 3 of the FDI Act (12
reserve deficiency charge. The Board for authority delegated to the Board by the U.S.C. 1813(c)(2)) that is deemed to be
good cause finds that delaying the Office of Management and Budget. The critically undercapitalized under
change in the penalty charge for reserve final rule contains no new collections of section 38 of the FDI Act (12 U.S.C.
deficiencies in order to allow notice and information and proposes no 1831o(b)(1)(E)) and its implementing
public comment on the change is substantive changes to existing regulations.
unnecessary. collections of information pursuant to (c)(1) Depository institution means an
the Paperwork Reduction Act. institution that maintains reservable
Regulatory Flexibility Act Certification
transaction accounts or nonpersonal
Pursuant to section 605(b) of the List of Subjects in 12 CFR Parts 201 and
time deposits and is:
Regulatory Flexibility Act (5 U.S.C. 204 (i) An insured bank as defined in
605(b)), the Board certifies that the Banks, Banking, Federal Reserve section 3 of the FDI Act (12 U.S.C.
amendments to Regulation A will not System, Reporting and recordkeeping 1813(h)) or a bank that is eligible to
have a significantly adverse economic requirements. make application to become an insured
impact on a substantial number of small bank under section 5 of such act (12
Authority and Issuance
entities. U.S.C. 1815);
Regulation A establishes rules under For the reasons set forth in the (ii) A mutual savings bank as defined
which Federal Reserve Banks may preamble, the Board is amending 12 in section 3 of the FDI Act (12 U.S.C.
extend credit to depository institutions CFR Chapter II as follows: 1813(f)) or a bank that is eligible to
as a backup source of liquidity. The make application to become an insured
final rule replaces the existing PART 201—EXTENSIONS OF CREDIT bank under section 5 of such act (12
adjustment and extended credit BY FEDERAL RESERVE BANKS U.S.C. 1815);
programs with primary and secondary (REGULATION A) (iii) A savings bank as defined in
credit programs. Like the existing 1. The authority citation for part 201 section 3 of the FDI Act (12 U.S.C.
regulation, the final rule does not is revised to read as follows: 1813(g)) or a bank that is eligible to
require an institution to use those make application to become an insured
programs. The vast majority of Authority: 12 U.S.C. 248(i)–(j), 343 et seq.,
347a, 347b, 347c, 348 et seq., 357, 374, 374a,
bank under section 5 of such act (12
institutions that choose to borrow under and 461. U.S.C. 1815);
the new programs will be eligible for (iv) An insured credit union as
primary credit, which has fewer 2. Sections 201.1 through 201.5 are
defined in section 101 of the Federal
conditions, requirements, and revised to read as follows:
Credit Union Act (12 U.S.C. 1752(7)) or
administrative costs than the adjustment § 201.1 Authority, purpose and scope. a credit union that is eligible to make
credit program that it replaces. The final (a) Authority. This part is issued application to become an insured credit
rule does not materially alter the under the authority of sections 10A, union pursuant to section 201 of such
existing seasonal credit program, which 10B, 11(i), 11(j), 13, 13A, 14(d), and 19 act (12 U.S.C. 1781);
is available to small depository of the Federal Reserve Act (12 U.S.C. (v) A member as defined in section 2
institutions with pronounced seasonal 248(i)–(j), 343 et seq., 347a, 347b, 347c, of the Federal Home Loan Bank Act (12
funding needs, except to remove a 348 et seq., 357, 374, 374a, and 461). U.S.C. 1422(4)); or
prerequisite to borrowing that the (b) Purpose and scope. This part (vi) A savings association as defined
Reserve Banks in practice have not used establishes rules under which a Federal in section 3 of the FDI Act (12 U.S.C.
for some time. Reserve Bank may extend credit to 1813(b)) that is an insured depository
Based on 2001 call report data, there depository institutions and others. institution as defined in section 3 of the
are approximately 16,250 depository Except as otherwise provided, this part act (12 U.S.C. 1813(c)(2)) or is eligible
institutions in the United States that applies to United States branches and to apply to become an insured
have assets of $150 million or less and agencies of foreign banks that are depository institution under section 5 of
thus are considered small entities for the act (12 U.S.C. 15(a)).
purposes of the Regulatory Flexibility 17 The Board notes that the volume for seasonal (2) The term depository institution
Act. In 2001, approximately 161 small credit in 2001 was below average. does not include a financial institution

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67786 Federal Register / Vol. 67, No. 216 / Thursday, November 7, 2002 / Rules and Regulations

that is not required to maintain reserves States government and federal-agency backup source of funding to a
under § 204.1(c)(4) of Regulation D (12 securities, and, if of acceptable quality, depository institution if, in the
CFR 204.1(c)(4)) because it is organized mortgage notes covering one-to four- judgment of the Reserve Bank, the
solely to do business with other family residences, state and local depository institution is in generally
financial institutions, is owned government securities, and business, sound financial condition and cannot
primarily by the financial institutions consumer, and other customer notes. obtain such credit in the market on
with which it does business, and does (3) If a Federal Reserve Bank reasonable terms. Credit extended under
not do business with the general public. concludes that a discount would meet the primary credit program is granted at
(d) Transaction account and the needs of a depository institution or the primary credit rate.
nonpersonal time deposit have the an institution described in section 13A (b) Secondary credit. A Federal
meanings specified in Regulation D (12 of the Federal Reserve Act (12 U.S.C. Reserve Bank may extend secondary
CFR part 204). 349) more effectively, the Reserve Bank credit on a very short-term basis,
(e) Undercapitalized insured may discount any paper indorsed by the usually overnight, as a backup source of
depository institution means any institution, provided the paper meets funding to a depository institution that
insured depository institution as the requirements specified in the is not eligible for primary credit if, in
defined in section 3 of the FDI Act (12 Federal Reserve Act. the judgment of the Reserve Bank, such
U.S.C. 1813(c)(2)) that: (b) No obligation to make advances or a credit extension would be consistent
(1) Is not a critically undercapitalized discounts. A Federal Reserve Bank shall with a timely return to a reliance on
insured depository institution; and have no obligation to make, increase, market funding sources. A Federal
(2)(i) Is deemed to be renew, or extend any advance or Reserve Bank also may extend longer-
undercapitalized under section 38 of the discount to any depository institution. term secondary credit if the Reserve
FDI Act (12 U.S.C. 1831o(b)(1)(C)) and (c) Information requirements. (1) Bank determines that such credit would
its implementing regulations; or Before extending credit to a depository facilitate the orderly resolution of
(ii) Has received from its appropriate institution, a Federal Reserve Bank serious financial difficulties of a
federal banking agency a composite should determine if the institution is an depository institution. Credit extended
CAMELS rating of 5 under the Uniform undercapitalized insured depository under the secondary credit program is
Financial Institutions Rating System (or institution or a critically granted at a rate above the primary
an equivalent rating by its appropriate undercapitalized insured depository credit rate.
federal banking agency under a institution and, if so, follow the lending (c) Seasonal credit. A Federal Reserve
comparable rating system) as of the most procedures specified in § 201.5. Bank may extend seasonal credit for
recent examination of such institution. (2) Each Federal Reserve Bank shall periods longer than those permitted
(f) Viable, with respect to a depository require any information it believes under primary credit to assist a smaller
institution, means that the Board of appropriate or desirable to ensure that depository institution in meeting regular
Governors or the appropriate federal assets tendered as collateral for needs for funds arising from expected
banking agency has determined, giving advances or for discount are acceptable patterns of movement in its deposits
due regard to the economic conditions and that the borrower uses the credit and loans. An interest rate that varies
and circumstances in the market in provided in a manner consistent with with the level of short-term market
which the institution operates, that the this part. interest rates is applied to seasonal
institution is not critically (3) Each Federal Reserve Bank shall: credit.
undercapitalized, is not expected to (i) Keep itself informed of the general (1) A Federal Reserve Bank may
become critically undercapitalized, and character and amount of the loans and extend seasonal credit only if:
is not expected to be placed in investments of a depository institution (i) The depository institution’s
conservatorship or receivership. as provided in section 4(8) of the seasonal needs exceed a threshold that
Although there are a number of criteria Federal Reserve Act (12 U.S.C. 301); and the institution is expected to meet from
that may be used to determine viability, (ii) Consider such information in other sources of liquidity (this threshold
the Board of Governors believes that determining whether to extend credit. is calculated as a certain percentage,
ordinarily an undercapitalized insured (d) Indirect credit for others. Except established by the Board of Governors,
depository institution is viable if the for depository institutions that receive of the institution’s average total deposits
appropriate federal banking agency has primary credit as described in in the preceding calendar year); and
accepted a capital restoration plan for § 201.4(a), no depository institution (ii) The Federal Reserve Bank is
the depository institution under 12 shall act as the medium or agent of satisfied that the institution’s qualifying
U.S.C. 1831o(e)(2) and the depository another depository institution in need for funds is seasonal and will
institution is complying with that plan. receiving Federal Reserve credit except persist for at least four weeks.
with the permission of the Federal (2) The Board may establish special
§ 201.3 Extensions of credit generally. Reserve Bank extending credit. terms for seasonal credit when
(a) Advances to and discounts for a depository institutions are experiencing
depository institution. (1) A Federal § 201.4 Availability and terms of credit. unusual seasonal demands for credit in
Reserve Bank may lend to a depository (a) Primary credit. A Federal Reserve a period of liquidity strain.
institution either by making an advance Bank may extend primary credit on a (d) Emergency credit for others. In
secured by acceptable collateral under very short-term basis, usually overnight, unusual and exigent circumstances and
§ 201.4 of this part or by discounting as a backup source of funding to a after consultation with the Board of
certain types of paper. A Federal depository institution that is in Governors, a Federal Reserve Bank may
Reserve Bank generally extends credit generally sound financial condition in extend credit to an individual,
by making an advance. the judgment of the Reserve Bank. Such partnership, or corporation that is not a
(2) An advance to a depository primary credit ordinarily is extended depository institution if, in the
institution must be secured to the with minimal administrative burden on judgment of the Federal Reserve Bank,
satisfaction of the Federal Reserve Bank the borrower. A Federal Reserve Bank credit is not available from other
that makes the advance. Satisfactory also may extend primary credit with sources and failure to obtain such credit
collateral generally includes United maturities up to a few weeks as a would adversely affect the economy. If

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Federal Register / Vol. 67, No. 216 / Thursday, November 7, 2002 / Rules and Regulations 67787

the collateral used to secure emergency excess loss in accordance with section § 201.52 [Removed]
credit consists of assets other than 10B(b) of the Federal Reserve Act. Each 5. Section 201.52 is removed.
obligations of, or fully guaranteed as to Federal Reserve Bank shall be assessed
principal and interest by, the United that portion of the amount that the PART 204—RESERVE
States or an agency thereof, credit must Board of Governors pays to the FDIC REQUIREMENTS OF DEPOSITORY
be in the form of a discount and five or that is attributable to an extension of INSTITUTIONS (REGULATION D)
more members of the Board of credit by that Federal Reserve Bank, up
1. The authority citation for part 204
Governors must affirmatively vote to to 1 percent of its capital as reported at
continues to read as follows:
authorize the discount prior to the the beginning of the calendar year in
extension of credit. Emergency credit which the assessment is made. The Authority: 12 U.S.C. 248(a), 248(c), 371a,
will be extended at a rate above the Board of Governors will assess all of the 461, 601, 611, and 3105.
highest rate in effect for advances to Federal Reserve Banks for the remainder 2. Amend § 204.7 by revising the
depository institutions. of the amount it pays to the FDIC in the second sentence of paragraph (a)(1) to
ratio that the capital of each Federal read as follows:
§ 201.5 Limitations on availability and Reserve Bank bears to the total capital
assessments. § 204.7 Penalties.
of all Federal Reserve Banks at the
(a) Lending to undercapitalized (a) * * *
beginning of the calendar year in which
insured depository institutions. A (1) * * * Federal Reserve Banks are
the assessment is made, provided,
Federal Reserve Bank may make or have authorized to assess charges for
however, that if any assessment exceeds
outstanding advances to or discounts for deficiencies in required reserves at a
50 percent of the total capital and
a depository institution that it knows to rate of 1 percentage point per year above
surplus of all Federal Reserve Banks,
be an undercapitalized insured the primary credit rate, as provided in
whether to distribute the excess over
depository institution, only: § 201.51(a) of this chapter, in effect for
such 50 percent shall be made at the
(1) If, in any 120-day period, advances borrowings from the Federal Reserve
discretion of the Board of Governors.
or discounts from any Federal Reserve Bank on the first day of the calendar
Bank to that depository institution are §§ 201.6–201.9 [Removed] month in which the deficiencies
not outstanding for more than 60 days occurred. * * *
during which the institution is an 3. Sections 201.6, 201.7, 201.8, and
* * * * *
undercapitalized insured depository 201.9 are removed.
By order of the Board of Governors of the
institution; or 4. Section 201.51 is revised to read as Federal Reserve System, October 31, 2002.
(2) During the 60 calendar days after follows: Jennifer J. Johnson,
the receipt of a written certification
§ 201.51 Interest rates applicable to credit Secretary of the Board.
from the chairman of the Board of
extended by a Federal Reserve Bank. [FR Doc. 02–28115 Filed 11–6–02; 8:45 am]
Governors or the head of the appropriate
federal banking agency that the (a) Primary credit. The rate for BILLING CODE 6210–01–P

borrowing depository institution is primary credit provided to depository
viable; or institutions under § 201.4(a) is a rate
(3) After consultation with the Board above the target federal funds rate of the DEPARTMENT OF TRANSPORTATION
of Governors. In unusual circumstances, Federal Open Market Committee.
when prior consultation with the Board (b) Secondary credit. The rate for Federal Aviation Administration
is not possible, a Federal Reserve Bank secondary credit extended to depository
should consult with the Board as soon institutions under § 201.4(c) is a rate 14 CFR Part 73
as possible after extending credit that above the primary credit rate. [Docket No. FAA–2002–13624; Airspace
requires consultation under this (c) Seasonal credit. The rate for Docket No. 02–AEA–17]
paragraph (a)(3). seasonal credit extended to depository RIN 2120–AA66
(b) Lending to critically institutions under § 201.4(b) is a flexible
undercapitalized insured depository rate that takes into account rates on Revocation of Restricted Area R–5207,
institutions. A Federal Reserve Bank market sources of funds. Romulus, NY
may make or have outstanding advances (d) Primary credit rate in a financial
to or discounts for a depository AGENCY: Federal Aviation
emergency. (1) The primary credit rate Administration (FAA), DOT.
institution that it knows to be a at a Federal Reserve Bank is the target
critically undercapitalized insured ACTION: Final rule.
federal funds rate of the Federal Open
depository institution only: Market Committee if:
(1) During the 5-day period beginning SUMMARY: This action removes
on the date the institution became a (i) In a financial emergency the Restricted Area R–5207 (R–5207),
critically undercapitalized insured Reserve Bank has established the Romulus, NY. The FAA is taking this
depository institution; or primary credit rate at that rate; and action in response to the Department of
(2) After consultation with the Board (ii) The Chairman of the Board of the Army’s notification that the military
of Governors. In unusual circumstances, Governors (or, in the Chairman’s no longer has an operational need for
when prior consultation with the Board absence, his authorized designee) the restricted area.
is not possible, a Federal Reserve Bank certifies that a quorum of the Board is EFFECTIVE DATE: 0901 UTC, January 23,
should consult with the Board as soon not available to act on the Reserve 2003.
as possible after extending credit that Bank’s rate establishment. FOR FURTHER INFORMATION CONTACT: Paul
requires consultation under this (2) For purposes of this paragraph (d), Gallant, Airspace and Rules Division,
paragraph (b)(2). a financial emergency is a significant ATA–400, Office of Air Traffic Airspace
(c) Assessments. The Board of disruption to the U.S. money markets Management, Federal Aviation
Governors will assess the Federal resulting from an act of war, military or Administration, 800 Independence
Reserve Banks for any amount that the terrorist attack, natural disaster, or other Avenue, SW., Washington, DC 20591;
Board pays to the FDIC due to any catastrophic event. telephone: (202) 267–8783.

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