The federal banking, thrift, and credit union regulatory
agencies today issued guidance on the appropriate use of the Federal Reserve’s
new primary credit discount window program in depository institutions’
liquidity risk management and contingency planning.
The guidance
provides background on the Federal Reserve’s discount window programs,
including new primary and secondary credit programs introduced in January. It
also reiterates well-established supervisory policies on sound liquidity
contingency planning, and discusses sound practices in using primary credit
program borrowings in liquidity contingency plans.
Adequate liquidity
contingency planning is critical to the ongoing maintenance of the safety and
soundness of any financial institution.
The guidance notes that sound liquidity contingency plans ensure
adequate diversification of the potential sources of funds to be used in a
contingency. By enhancing the
availability of discount window credit, the Federal Reserve’s new primary
credit program offers depository institutions an additional source of backup
funds for managing short-term liquidity risks and thus can enhance the
diversification of contingency funds.
The guidance notes that appropriate use of primary credit
for contingency situations requires institutions to ensure that: 1) the necessary
documentation and collateral arrangements are in place; 2) primary credit lines
are periodically tested; 3) viable take-out or exit strategies exist to replace
primary credit borrowings; and 4) appropriate cost/benefit analyses are
conducted in light of the cost of primary credit borrowings relative to other
sources of short-term contingency funds.
Finally, the
guidance notes that occasional use of primary credit for short-term contingency
funding should be viewed as appropriate and unexceptional by both management
and supervisors. At the same time, the
guidance emphasizes that the primary facility is only one of
many tools
institutions may use in managing their back-up liquidity needs, and that
institutions should maintain access to a diversified array of funding
sources. The use of primary credit, or
any other potential source of contingency funding, is a management decision
that must be made in the context of safe and sound management practices.
The guidance is being issued by the Board of Governors of
the Federal Reserve System, Federal Deposit Insurance Corporation, Office of
the Comptroller of the Currency, Office of Thrift Supervision and National
Credit Union Administration.
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Media Contacts:
Federal Reserve Dave Skidmore (202) 452-2955
FDIC Frank Gresock (202) 898-6634
NCUA Cherie Umbel (703)
518-6330
OCC Bob Garsson (202)
874-5770
OTS Sam Eskenazi (202) 906-6677