Saving the commercial paper market -
Fed says banks can loan against ABCP -
Conde Nash Portfolio blog-
portfolio.com
An informative blog article
Actual source blog -
nakedcapitalism.com
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As a result, the Fed has now taken what (for it) is a novel step, that of allowing banks to use investment grade ABCP, as it is known in the trade, as collateral. Greg Ip at the Wall Street Journal explains:
In another step aimed at unfreezing the commercial paper market, the Federal Reserve Bank of New York clarified its discount window rules with the effect of enabling banks to pledge a broader range of commercial paper as collateral.
Under the clarification, issued verbally by New York Fed officials to market participants in the last day, banks may pledge asset-backed commercial paper for which they also provide the backup lines of credit.
"This strikes us as a very big deal," said Lou Crandall, chief economist at Wrightson-ICAP LLC....The clarification, he said, means if an issuer is unable to sell an entire portion of its paper, the bank providing the backstop can finance the unsold portion with a discount window loan, backed by the assets underlying the paper.
"We are comfortable taking investment-quality asset-backed commercial paper for which the pledging bank is the liquidity provider. This is a clarification of something that has become, over time, accepted practice at the Federal Reserve Bank of New York," said New York Fed spokesman Calvin Mitchell.....
Several market sources however interpreted the action more as a change in, than a clarification of, policy. "Previously banks could not post such ABCP as collateral, that is ABCP for which the bank is a liquidity backstop," said Michael Feroli, economist at J.P. Morgan Chase, in a note to clients. "While reluctant to characterize this as a major change in direction, our contact at the Fed noted that this measure was a means to 'insert flexibility' in the way the window deals with evolving needs," Mr. Feroli wrote.
Another sign of how seriously the Fed is taking this matter is that it has quietly relaxed some of its rules around regulatory capital. Note that the Rodgin Cohen mentioned below is the dean of bank regulatory lawyers:
In the past week, the Fed gave temporary exemptions to three major bank holding companies from limitations on loans between their bank and securities dealers units, according to people familiar with the matter. It also notified banks, via a letter to Rodgin Cohen, chairman of New York law firm Sullivan & Cromwell LLP, that loans secured by debt and equity securities meeting certain conditions would attract a lower risk weighting than regular loans to private borrowers. That means the bank has to put aside less capital per dollar loaned.
"Less capital per dollar loaned" translates into, "You can lend more against that capital." |
