FACTBOX-Mechanics of the Fed's Bear Stearns rescue plan
warrants.bnpparibas.com
NEW YORK, March 14 (Reuters) - Following are details on how the Federal Reserve Bank of New York's planned rescue of Bear Stearns Cos. Inc. is intended to work. JPMorgan Chase & Co has agreed to provide secured funding to Bear, as necessary, for up to 28 days, through borrowings from the Fed's discount window.
THE DISCOUNT WINDOW:
The discount window is where banks in need of short term funds can borrow directly from the Fed. But Bear Stearns is a non-depository institution and ineligible to borrow directly at the Fed's discount window, Fed staff said.
Since Bear Stearns is not entitled to go to the discount window, JPMorgan, a bank, "is acting as a conduit, to go to the discount window and lend to Bear Stearns," said Kenneth Kim, economist with Stone & McCarthy Research Associates, in Princeton, New Jersey.
The interest rate on Fed discount window loans is known as the discount rate and is currently 3.5 percent. The rate is set by the Federal Reserve Board, normally in conjunction with the benchmark federal funds target rate, which is now 3.0 percent.
Both of these rates will be reviewed by the Fed at its March 18 policy meeting.
COLLATERAL FROM BEAR STEARNS:
JPMorgan will post collateral from Bear Stearns at the discount window and the Fed is looking to Bear Stearns collateral to repay the loan, and not to JPMorgan, Fed staff said.
COLLATERAL THE FED ACCEPTS:
At the discount window, these are some of the types of collateral the Fed can accept in exchange for making short term loans, according to the New York Fed Web site:
U.S. Treasury securities
Agency debt
Corporate bonds
Mortgage-backed securities (includes agency and so-called "private label" or non-agency MBS).
PURPOSE OF THE DISCOUNT WINDOW:
"The Discount Window functions as a safety valve in relieving pressures in reserve markets; extensions of credit can help alleviate liquidity strains in a depository institution and in the banking system as a whole. It also helps ensure the basic stability of the payment system by supplying liquidity during times of systemic stress," according to the New York Fed Web site.
THE FED'S TOTAL PORTFOLIO:
The Federal Reserve's total portfolio of securities held outright in the SOMA (System Open Market Account) was $703.4 billion as of Wednesday, according to New York Fed data.
RECENT ACTIVITY AT THE DISCOUNT WINDOW
Traditionally, banks have been wary of borrowing at the discount window because that carries an implicit stigma that an institution could be in trouble. But since the Federal Reserve cut the discount rate in August in response to the first wave of credit market upheaval, discount window borrowing has increased somewhat, with occasional spikes.
For the week ended Sept. 12, 2007, primary credit borrowings nearly tripled from the prior week to a daily average of $3.16 billion, hitting a single-day peak of $7.15 billion on Sept. 12 -- their highest since banks borrowed $45.5 billion on the day after the Sept. 11, 2001 attacks on New York and Washington.
TERM AUCTION FACILITY
Discount window borrowing also was heavy in mid-December and early January amid high year-end cash demands. But by then, the Fed had also launched its new Term Auction Facility (TAF) to pump more funds into the banking system. This facility allowed banks to borrow from the Fed anonymously and avoid the "lender of last resort" stigma associated with having to turn to the discount window after failing to secure funds in the interbank market.
The Term Auction Facility has since been expanded twice, and the two March auctions will total $100 billion, compared to $60 billion in February.
The Fed announced a new short term lending facility this week to lend up to $200 billion in Treasuries over a 28-day period starting March 27, the TSLF (Term Securities Lending Facility), which is exclusively for use by primary dealers.
HISTORICAL PRECEDENT
According to the Federal Reserve Bank of Richmond's Web site, the Fed Board could determine that if "unusual and exigent circumstances" exist, discount window loans may be made to individuals, partnerships, and corporations that are not depository institutions.
"Such lending can take place only if the Board and the local Reserve Bank find that credit from other sources is not available and that failure to lend may have adverse effects on the economy. This last authority has not been used since the 1930s," the Richmond Fed said.
Fed senior staff said on Friday that the Fed authorized lending to non-bank firms again in the 1960s but does not believe any such institutions took them up on the offer.
NEXT WEEK'S DISCOUNT WINDOW DATA:
Market analysts will watch next week's discount window data for the week through Wednesday March 19 very closely, because that may indicate what Bear's initial need for funding is.
The data are scheduled for release at 4:30 p.m. on Thursday March 20.
In the most recent week ended March 12, the Fed said discount window primary credit borrowings totaled $99 million, including $23 million on Wednesday. |
