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TO:
Files
FROM: Legal Division 1
FILED: March 9, 2009
SUBJECT: Authority of the Federal
Reserve to provide extensions of
credit in connection with a
commercial paper funding facility
(CPFF)
SUMMARY: The Board may authorize the Federal Reserve Bank of New
York ("Reserve Bank") to extend credit to a special purpose vehicle that
purchases commercial paper ("CP") of U.S. issuers ("eligible issuers"). The
Reserve Bank may satisfY the requirements of the Federal Reserve Act by
accepting, in connection with such extensions of credit, either collateral, a
third-party indorsement, or an insurance fee provided to the Reserve Bank in
connection with the extension of credit. This memorandum embodies advice
provided by the Legal Division to the Board as part of its consideration of
the CPFF in early October 2008,2
FACTUAL BACKGROUND:
On October 7, 2008, the Board approved the establishment of a
Commercial Paper Funding Facility ("the CPFF") to provide liquidity to the
CP market in coordination with the Federal Reserve's existing credit
facilities. The CPFF was designed to encourage investors to engage in term
lending in the CP market, resulting in lower CP rates and increased demand
for CPo
CPFF credit would be extended to eligible issuers through a special
purpose vehicle established for that purpose ("CPFF SPV"). Under the
CPFF, the Reserve Bank would commit to lend to the CPFF SPY with
Scott G. Alvarez, Richard M. Ashton, Kieran 1. Fallon, Mark E. Van Der Weide, and
Sophia H. Allison
2 This memorandum was finalized in February 2009 based upon advice provided at that
time.
1
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FCIC-133533
2
recourse. The Reserve Bank would extend credit at the target federal funds
rate. The CPFF Spy would purchase, directly from eligible issuers,
3-month U.S. dollar-denominated CP. Eligible issuers are U.S. issuers of
CP, including U.S. issuers with a foreign parent. The CPFF Spy would
purchase only CP that is rated at least AIIPIIFI by a major Nationally
Recognized Statistical Rating Organization ("NRSRO") and, if rated by
multiple major NRSROs, is rated at least AIIP11F1 by two or more major
NRSROs. The CPFF Spy would purchase both asset-backed CP ("ABCP"),
which is secured by the assets that form the corpus of the asset securitization
trust from which the ABCP is issued, and unsecured CP.
The Reserve Bank's extension of CPFF credit would be secured by all
of the assets of the CPFF SPY. At the time of its registration to use the
CPFF, each issuer must pay to the CPFF Spy a facility fee equal to 10 basis
points of the maximum amount of its CP that the CPFF SPY may own. 3 The
CPFF Spy will purchase unsecured CP at a discount equal to the current 3month overnight index swap rate ("OIS") plus 100 basis points and will
purchase ABCP at a discount of OIS plus 300 basis points. On each
unsecured CP transaction with the CPFF SPY, the issuer will be charged
100 basis points per annum on the face value of the CP at the time of
settlement. An issuer may avoid the unsecured credit surcharge if the issuer
(1) provides a collateral arrangement for the CP that is acceptable to the
Reserve Bank or (2) obtains an indorsement or guarantee of its obligations
on the CP that is acceptable to the Reserve Bank.
The maximum amount of a single issuer's CP the Spy may own at any time will be the
greatest amount of U.S. dollar-denominated CP the issuer had outstanding on any day
between January 1 and August 31,2008. The SPY will not purchase additional CP from
an issuer whose total CP outstanding to all investors (including the SPY) equals or
exceeds the issuer's limit.
3
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3
DISCUSSION:
A.
Indorsed or Otherwise Secured to the Satisfaction of the
Reserve Bank
Section 13(3) of the Federal Reserve Act allows the Board to
authorize a Reserve Bank to discount notes for an individual, partnership, or
corporation ("IPC") under specified circumstances, including a requirement
that the notes be "indorsed or otherwise secured to the satisfaction" of the
Reserve Bank. 4 In the case of the CPFF, the direct lending counterparty of
the Reserve Bank-the borrower-is the CPFF SPY. Under the facility, the
Reserve Bank would discount a note of the CPFF SPY secured by all of the
CP owned by the CPFF SPY. As noted above, the CP would all be highly
rated and the CPFF Spy would acquire the CP at a pre-set discount. The
Reserve Bank would have recourse to all of the assets of the SPY, which
would include the earnings and fees accumulated in the course of the
operation of the SPV. On this basis, the Reserve Bank may reasonably
conclude that it is secured to its satisfaction for purposes of section 13(3).
While this arrangement meets the requirements of section 13(3)
(assuming all of the other requirements of section 13(3) are met) that the
discount be secured to the satisfaction of the Reserve Bank, it is also useful
to consider how the section would apply assuming that each purchase of CP
is viewed as an extension of credit to (or discount of a note of) the CP issuer.
If the CPFF is viewed as involving extensions of credit from the Reserve
Bank to the CP issuers, under the facility as designed, those extensions of
4
12 U.S.c. 343.
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4
credit would meet the statutory requirement that the credit be "indorsed or
otherwise secured to the satisfaction of the Reserve Bank.,,5
1.
Indorsement
Under the CPFF, CP may be indorsed. Section 13(3) allows the
Reserve Bank, with proper authorization, to discount a note "indorsed ...
[by] an individual, partnership, or corporation." An indorsement is a
guaranty by an entity other than the issuer of the note under which the third
party agrees to pay the obligation in the event of default by the issuer. 6
Because a Reserve Bank has full discretion to determine whether or not to
extend credit, the Reserve Bank may insist that the indorsement be from a
party with financial capacity to meet the guarantee obligation that is
satisfactory to the Reserve Bank.
Extensions of credit based on indorsed CP would meet the
requirements for discount under section 13(3), even if the credit is not also
collateralized. Section 13(3) as originally enacted in 1932 specified that
notes discounted by a Reserve Bank under section 13(3) be both indorsed
5 In either case, the credit extended in connection with the CPFF would be viewed as a
"discount" of a "note" within the terms of section 13(3). For purposes of section 13(3), a
note is any written promise to pay a stated amount of money, with or \vithout interest or
other charges. See Memorandum, dated April 2, 2008, to the Board of Governors from
the Legal Division concerning an extension of credit in connection with the acquisition of
Bear Stearns. The Board consistently has viewed the term "discount" under section 13(3)
as including a Reserve Bank advance to an IPC (a loan to an IPC by a Reserve Bank on
the borrowing IPC's own note) as well as a purchase by a Reserve Bank of third-party
notes held by an IPC. Id. Here, the Reserve Bank would be making an advance to the
CPFF SPY on its note or, alternatively, making an advance to the CP issuers on their
notes if the purchase of CP is viewed in effect as an advance to the issuer on the CP. In
the latter case, the Reserve Bank, through the CPFF SPY, would be making a discount of
the CPo
6 See,
C. Woelfel, Encyclopedia of Banking and Finance (lOth ed.) at 548. See also
section 13(2) of the Federal Reserve Act, which authorizes the Reserve Banks "[u]pon
the indorsement of any of its member banks," to discount notes, drafts, and bills of
exchange arising out of commercial transactions. 12 U.S.C. 343.
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5
and otherwise secured to the Reserve Bank's satisfaction. 7 Only three years
later, however, Congress amended section 13(3) to permit Reserve Banks to
discount notes for IPCs where the notes are either "indorsed or otherwise
secured to the satisfaction of the Reserve Bank."s From the legislative
history of the Act it is clear that indorsements under the Act were for the
purpose of providing the Reserve Bank additional assurance of repaymentabove and beyond considerations regarding the soundness of the discounted
asset, the creditworthiness of the borrower, and the compliance of the
transaction with other technical requirements of the Act. 9 Therefore,
indorsement alone serves a function that is similar to that of collateral: an
additional security of repayment. 10
2.
Otherwise secured
a)
Collateral
Some paper discounted by the CPFF Spy will be ABCP. ABCP itself
is "secured" for section 13(3) purposes: the collateral would be the assets
Pub. L. 72-203, Section to, 47 Stat. 709, 715 (July 21, 1932).
Pub. L. 74-305, Section 322, 49 Stat. 714 (Aug. 23, 1935).
9 During the House debates it was stated that discounted paper "would be 'gilt-edge
paper, entirely safe' because, after passing the scrutiny of the member bank that had
made the original loan, it must then pass the scrutiny of the Federal Reserve Bank and, in
addition, have the endorsement [sic] of the member bank." H. Hackley, Lending
Functions of the Federal Reserve Banks: A History at 22 (May 1973), citing 50 Congr.
Rec. 4675 (Sep. to, 1913) (remarks of Congressman Phelan).
10 The Board ruled in 1932 that under section 13(3) an "indorsement itself is considered
security." Memorandum to Board from Mr. Wyatt, General Counsel, "Loans by Federal
Reserve Bank of New York to Scaramelli and Company, Inc." (Sep. 16,1932) (Legal
Records No. 1200.300-J). On that basis, the Board ruled that when section 13(3) required
discounted notes thereunder to be both indorsed and otherwise secured, having the same
party both indorse and guarantee the discounted paper was insufficient because a
guaranty and an indorsement served the same function. Letter to Governor Harrison from
Secretary of the Board (Oct. 25, 1932) (Legal Records No. 1200.300-1). Since
amendment of section 13(3) to permit discounted assets to be indorsed or secured,
section 13(3) on its face authorizes otherwise unsecured lending when the obligation is
indorsed to the satisfaction of the Reserve Bank.
7
8
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6
that constitute the corpus of the asset securitization special purpose vehicle
that issues the ABCP.
Under the extraordinary pressures currently existing in financial
markets, it is possible that at certain points in time the current value of the
assets pledged in support of ABCP in the CPFF Spy may not be equal in
value to the face amount of the ABCP. Even under those circumstances,
however, the CPFF SPY's purchase of ABCP would be authorized under
section 13(3). As noted above, the language of section 13(3) imposes no
requirements on the amount or type of security obtained by a Reserve Bank
in connection with an extension of IPC credit other than that the credit be
secured "to the satisfaction of the Reserve Bank." This requirement has
traditionally been met by collateral that secures the repayment of the credit.
The absence of any objective criteria in the statutory language for the
sufficiency of collateral leaves the extent and value of the collateral within
the discretion of the Reserve Bank. Congress could have imposed minimum
objective criteria on Reserve Bank secured lending under section 13(3) if it
so chose. For example, section 13(13) allows lending against only specified
types of collateral, 11 and section lOB imposes different duration limits on
Reserve Bank credit to banks based on the type of collateral securing the
credit. 12
The Act could have provided that section 13(3) credit must be secured
solely by collateral whose fair market value at the time credit is extended is
at least equal to the amount of credit extended. Similarly, the Act could
have provided that collateral securing a section 13(3) extension of credit
must at all times after the original extension of credit maintain a fair market
II
12
12 U.S.C. 347c.
12 U.S.C. 347b.
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7
value at least equal to the amount of credit that continues to be outstanding.
However, such a requirement would not have been consistent with ordinary
banking practice, and would have undermined the very purpose of
section 13(3), which was to make credit available in unusual and exigent
circumstances to help restore economic activity.13 Congress imposed no
such limitations under section 13(3). Therefore, the Reserve Bank has the
discretion to accept as collateral securing the section 13(3) discount of an
IPC note collateral of any value, including collateral that at the time of the
extension of credit may have a current market value that is less than the
amount of credit extended, provided that the credit is secured to the Reserve
Bank's satisfaction. 14
Another alternative under the CPFF allows the issuer to provide
satisfactory collateral arrangements for CP that is not ABCP. As noted
above, collateral is a typical method used to secure a credit to the
"satisfaction of the Reserve Bank" under section 13(3).
b) Insurance foe
An alternative available under the CPFF for securing the credit to the
satisfaction of the Reserve Bank allows issuers that sell unsecured CP
without indorsement or collateral to pay to the CPFF Spy an unsecured
credit premium of a 100 basis points per annum on each sale of CP to the
Spy. This premium would be charged to the issuer at the time of settlement
and would not be refundable. The premium is designed to be an insurance
For example, mortgage loans and many types of corporate real estate loans do not
require posting additional collateral if the value ofthe house or other asset securing the
loan declines below the value of the mortgage or loan.
14 While unnecessary to decide at this time, the existence of a statutory requirement that
the discount or otherwise secured, when read in light of the legislative history indicating
that Congress believed the Reserve Banks would be protected in extending credit, likely
supports the view that an extension of credit under section 13(3) that is not indorsed may
not be entirely unsecured. See generally H. Hackley, supra, at 129.
13
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8
premium based on historical loss rates for AIIPIIFI CPo This premium is in
addition to the facility fee of 10 basis points that would be charged all
issuers whose CP is purchased on thc maximum amount ofthc issuer's CP
the CPFF Spy may own and the haircut (or discount) imposed on each
purchase of CP by the CPFF SPV.
Like an insurance company or fund, these premiums (along with any
earnings on the CP in the CPFF SPY) would serve as a source of funds to
repay the CPFF SPY's extension of credit from the Reserve Bank if losses
result from the CP. Also, like an insurance company or fund, the pool of
premiums would be available to offset any losses, that is, the premium paid
by one issuer would be available to offset losses of other issuers, not just
losses from the issuer paying the premium. Mutualization of losses is an
important and defining characteristic of an insurance company or fund.
Moreover, the aggregate premiums retained in the CPFF Spy were
computed to cover those expected losses over the expected life of the
facility. Historically the default rate of AIIPIIF I-rated CP is very low. 15
This type of insurance arrangement may allow a Reserve Bank to
determine under section 13(3) that it is "secured to [its] satisfaction." As
noted above, no criteria are specified in the Act for the manner in which a
Reserve Bank may become secure; and the Act does not define either
"secured" or "satisfaction." As such, the interpretation of these terms is
committed to the Board's discretion. 16
15 E.g., J. Rosenberg and S. Maurer, Benchmarks for the risk of a commercial paper
portfolio (Nov. 13,2008); J. McAndrews and J. Rosenberg, Securing the credit extended
in the CPFF to the satisfaction ofthe Reserve Bank through fee-based methods (Oct. 9,
2008).
16 Courts generally are required to defer to interpretations of statutes made by the
administrative agency with specific jurisdiction to implement the statute where the
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9
While collateral is the most common form of security, the term
"secured" can refer to any "ground for regarding something as secure, safe,
or certain.,,17 Discretion is left to the Reserve Bank in determining adequate
security within the parameters for the discount authorized by the Board. In
enacting section l3(3), Congress could have required that such credit be
secured with a pledge of certain kinds of collateral, or with a pledge of
collateral in general, but Congress did not do so. To the contrary, the single
amendment Congress made to the relevant portion of section l3(3) was to
increase, not decrease, the scope of acceptable security by amending
"indorsed and otherwise secured" to read "indorsed or otherwise secured."
Therefore, the scope of the Reserve Bank's discretion in deciding what will
be "satisfactory" to it in connection with section 13(3) lending is extremely
broad.
A program of insurance premiums based on historical loss experience
with the credit extended would appear permissible. Insurance is a common
method for becoming secure, and is analogous to an indorsement by a third
party, a type of security specifically recognized by section l3(3). By
collecting premiums that would otherwise be adequate to cover losses in the
same manner as an insurance company, the CPFF SPY and the Reserve
Bank insure themselves against losses on the underlying CP, and may
become secure.
B.
Eligibility of Depository Institutions under the CPFF
F or financial issuers of CP, the CP is ordinarily issued by the parent
company or by an affiliated entity set up specifically for that purpose,
statutory language is ambiguous and the interpretation is reasonable. See, U, Chevron
U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984).
17 Oxford English Dictionary (2d. ed. 1989).
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10
neither of which have access to Federal Reserve credit that is normally
available to their subsidiary depository institutions ("DIs"). Some DIs,
however, issue CP that is eligible to be purchased by the CPFF SPY. Under
section lOB of the Act, Reserve Banks may make advances to certain DIs
with maturities of not more than four months that are secured to the
satisfaction of the Reserve Bank. 18
Assuming that under the CPFF the Reserve Bank is viewed as
extending credit to these 01 issuers ofCP, the purchase of the CP could be
viewed as an advance by the Reserve Bank to the issuing 01. Under the
CPFF, the maturities of the CP purchased may not exceed three months. In
addition, based on the analysis above, the credit based on ABCP or
unsecured CP where the issuer pays the unsecured surcharge or provides
collateral would be secured to the satisfaction of the Reserve Bank. In these
circumstances, the credit would meet the requirements of section lOB
If the 01 issuer ofCP that is not ABCP proposes to avoid the
unsecured surcharge by obtaining an indorsement, and not by providing
other collateral arrangements, there is an argument that section lOB does not
authorize the credit. Section lOB does not contain language, similar to that
in section 13(3), expressly permitting extensions of credit on the indorsed
note of the 01. An inference could be drawn that the absence of an explicit
reference to an indorsement in section lOB means that Congress intended
that notes that only were indorsed and not otherwise secured were not
eligible for advances under that section. On the other hand, section 13(3)
requires notes be "indorsed or otherwise secured," indicating that an
indorsement is a form of security that could be used to meet the "secured to
the satisfaction" requirement in section lOB. In any event, even assuming
18
12 U.S.c. ยง 347b, 461 (b)(7).
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11
that section 1DB does not permit advances on otherwise unsecured CP that
only carries an indorsement, the Reserve Bank may extend credit to the DI
on such paper under the CPFF relying on the authority of section 13(3).
Depository institutions are corporate entities eligible to borrow under
section 13(3). Indeed, the Board concluded in 1975 that discounts could be
made to depository institutions under section 13(3).19 The fact that
depository institutions that issue CP may have access to other types of
Federal Reserve credit should not disqualify these corporate entities from
borrowing under section 13(3).20 There is no evidence in the legislative
history of a congressional intent to limit lending to depository institutions to
those lending authorizations in the Act available to depository institutions
only. Moreover, the terms of section 13(3) should be interpreted in light of
the provision's broad remedial purpose to enable the Federal Reserve to
provide emergency credit to any individual or entity that was previously
unable to get such credit from the Federal Reserve.
C. Lack of Adequate Credit Accommodations
Section 13(3) of the Federal Reserve Act requires a Reserve Bank to
"obtain evidence that [the borrower] is unable to secure adequate credit
19 From the time of its enactment, the Board has consistently interpreted language
contained in section 13(13) of the Act, which authorizes advances to any "partnership or
corporation" secured by U.S. and U.S. agency obligations, to permit advances to both
member and nonmember banks. H. Hackley, supra, at 131; 1942 Fed. Res. Bull. 207.
Like phrases and terms used in the same statute should be interpreted in the same way
absent clear basis in the statute or legislative history to the contrary.
20 In guidelines for emergency lending to nonmember conmlercial banks and savings
banks issued in 1975, which outlined various alternatives for lending to nonmember
banks (not then eligible for regular discount window lending), the Board noted that
section 13(3) was available to support lending to these DIs. Although no section 13(3)
loans were made under these guidelines, they explicitly state that the term "corporation"
in both sections 13(3) and 13(13) includes incorporated banks, whether or not members
ofthe System. S-2276 and S-2276a, March 31, 1975. This interpretation represented a
reversal of the Board's initial view of section 13(3) that "corporation" as used in the
section did not include banks. 1932 Fed. Res. Bull. 518.
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12
accommodations from other banking institutions." The wording of this
statutory requirement is ambiguous and undefined, and thus the Board would
be accorded significant deference in defining the standard. 21 The Board's
Regulation A does not require any specific type of evidence for this finding
and bases the finding simply on "the judgment of the Reserve Bank" about
credit availability?2
Because section 13(3) of the Federal Reserve Act speaks of
"obtain[ing] evidence" of a lack of "adequate credit accommodations," it
contemplates that a Reserve Bank could lend to a borrower even when credit
might be available at some price or under some conditions, but there is
evidence that the price or conditions are not reasonable. Indeed, Congress
added section 13(3) to the Act in 1932 to allow the Federal Reserve to
extend credit to creditworthy borrowers on satisfactory security during a
nationwide banking crisis when market conditions prevented credit from
being available even to borrowers in sound condition. Importantly, the
statute does not require an incontrovertible finding that each borrower
cannot obtain adequate credit accommodations. Moreover, the statute does
not specify the type or amount of evidence needed. In this circumstance, it
would appear reasonable to interpret the statute as allowing the Reserve
Bank broad discretion to base its decision on information that indicates that
the market for an important type of credit is not functioning.
Over the past year, the CP market has been under considerable strain
as money market mutual funds ("MMMFs") and other investors have
become increasingly reluctant to purchase CP, especially CP with
longer-dated maturities. MMMFs held $3.4 trillion in assets as of October 1,
21
See,~, Chevron U.S.A., Inc., supra.
22
See 12 CFR 201.4(d).
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13
2008. These funds are major purchasers and holders of high quality shortterm debt instruments, including highly-rated CP and ABCP. In September
2008, the ongoing strains in the financial markets placed severe liquidity
pressures on many MMMFs as redemption requests by investors increased
significantly.
In ordinary circumstances, MMMFs would have been able to meet
these redemption demands by selling assets. However, an uncommon level
of redemption demands by large institutional investors in MMMFs placed
increasing stress on MMMFs to sell assets. These forced sales at a time of
financial market stress placed substantial downward pressure on the price of
ABCP and other CP, resulting in further losses to MMMFs and even higher
levels of redemption demands as investors lost confidence in MMMFs and
the financial markets more generally. This stress was amplified by
restrictions under the securities laws on the level of borrowing that can be
undertaken by MMMFs.
As a result, the volume of outstanding CP has shrunk, interest rates on
longer-term CP have significantly increased, and an increasingly high
percentage of CP is required to be refinanced on a daily basis. The
difficulties of placing with third parties CP issued or sponsored by financial
intermediaries made it more difficult for those intermediaries to meet the
credit needs of businesses and households. 23 Accordingly, there is sufficient
evidence to support a judgment that adequate credit accommodations for
eligible issuers of term CP are not available from other banking institutions.
23 Report pursuant to Section 129 of the Emergency Economic Stabilization Act of2008:
Commercial Paper Funding Facility (CPFF) (Oct. 14,2008).
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D. Unusual and Exigent Circumstances
To authorize credit extensions to IPCs under section 13(3) of the
Federal Reserve Act, the Board must find that "unusual and exigent
circumstances" exist. These terms are not defined in the Federal Reserve
Act and, as explained above, are committed to the Board's discretion. In the
past, the Board has based a finding of unusual and exigent circumstances on
general market conditions. The history of the Board's findings of ''unusual
and exigent circumstances" in various situations from 1932 through 1969,
and the legislative history of the 1991 amendments to Section 13(3), are set
forth in staffs memorandum to the Board dated April 2, 2008. 24
Currently, financial systems in the United States and in much of the
rest of the world are under extraordinary stress, particularly the credit and
money markets. The losses suffered by many banks and nonbank financial
firms have both constrained their ability to lend and reduced the willingness
of other market participants to deal with them. Ongoing developments in
financial markets are directly affecting the broader economy through several
channels, most notably by restricting the availability of credit. More
recently, however, deteriorating financial market conditions have disrupted
the commercial paper market and other forms of financing for a wide range
of firms, including investment-grade firms. Great uncertainty about the
values of financial assets has made investors extremely reluctant to bear
credit risk, resulting in further declines in asset prices and a drying up of
liquidity in a number of funding markets. Even secured funding has become
expensive and difficult to obtain, as lenders worry about their ability to sell
Memorandum, dated April 2, 2008, to the Board of Governors from the Legal
Division concerning an extension of credit in connection with the acquisition of Bear
Steams.
24
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15
collateral in illiquid markets in the event of default. In addition, many
securitization markets, such as the secondary market for private-label
mortgage-backed securities, remain closed or impaired.
Growing concerns about the U.S. housing sector and economy have
contributed to extraordinarily turbulent conditions in global financial
markets in recent weeks. Equity prices have fallen sharply, the cost of
short-term credit, where such credit has been available, has spiked, and
liquidity has dried up in many markets. MMMFs responded to surges in
redemptions by attempting to reduce their holdings of commercial paper and
large certiticates of deposit issued by banks. Some tirms that could not roll
over maturing commercial paper drew on back-up lines of credit with banks
just as the banks were finding it even more difficult to raise cash in the
money markets. At the same time, a marked increase in the demand for safe
assets--a flight to quality and liquidity--resulted in a further drop in the value
of mortgage-related assets and sent the yield on Treasury bills down to a few
hundredths of a percent. In light of current conditions, there is manifest
evidence that "unusual and exigent circumstances" exist sufficient to support
the Board's authorization of the CPFF under section 13(3) of the Act.
The authorization for providing discounts to the CPFF SPY must
terminate when conditions are no longer "unusual and exigent." At that
point, it would be reasonable to permit the CPFF SPY a reasonable period of
time to unwind its operations and liquidate its holdings in a manner designed
to best ensure repayment. A reasonable liquidation period is consistent with
sound banking practices and with the requirement that the Reserve Bank be
secured to its satisfaction.
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16
E. Other Requirements of Section 13(3)
The establishment of the CPFF meets the other requirements of
section 13(3). The facility has been approved by the affirmative votes of
five Board members. The Board has also approved the rates to be charged
in connection with the facility as established by the Reserve Bank. See 12
U.S.C. 357.25
CONCLUSION: For the reasons stated above, and in view of all the facts
of record, the Board had statutory authority to authorize the Reserve Bank to
extend credit under the CPFF under section 13(3) of the Federal Reserve
Act.
25 Although Regulation A contains provisions relating to the rate for emergency credit
from the Reserve Banks, these provisions do not limit the Board's power to authorize
lending under section 13(3) in other circumstances and under other limitations and
restrictions. Section 13(3) allows the Board to authorize any Federal Reserve Bank to
extend credit to any IPe "during such periods as the said board may determine" and
"subject to such limitations, restrictions and regulations as the [Board] may prescribe."
The Board, therefore, has complete statutory discretion to determine the timing and the
conditions oflending under section 13(3). Regulation A represents one exercise of that
authority in the form of an ongoing authorization to the Reserve Banks to lend under
section 13(3) when the conditions in Regulation A are met. This conclusion is supported
by the fact that Regulation A does not by its terms purport to be a comprehensive
regulation implementing each component of each lending authority of the Federal
Reserve System (or even of each emergency lending authority of the Federal Reserve).
Nor does the regulatory history of Regulation A suggest that the Board intended the rule
to set forth the exclusive methods for the Reserve Banks to extend credit.
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@FedFRASER