Federal Reserve Lending Disclosure - FEDERAL RESERVE BANK of NEW YORK
Testimony
Federal Reserve Lending Disclosure
June 1, 2011
Thomas C. Baxter Jr.
, Executive Vice President and General Counsel
Testimony of Thomas C. Baxter, Jr., and Scott G. Alvarez, General Counsel of the Board of Governors, before the Subcommittee on Domestic Monetary Policy and Technology, Committee on Financial Services, U.S. House of Representatives, Washington, D.C.
Chairman Paul, Ranking Member Clay, and members of the Subcommittee, we appreciate
the opportunity to discuss the different ways in which the Federal Reserve
informs the Congress and the American people about our policies and actions. The
Federal Reserve regularly releases significant, detailed information about
its operations. Our aim in doing so is to promote understanding of how
the Federal Reserve fosters financial and economic stability and to facilitate
an evaluation of our actions while also preserving the ability to effectively
fulfill the responsibilities that the Congress has given the Federal Reserve. In
that context, we will describe the Federal Reserve’s compliance with
the disclosure provisions of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act), including the data we released in December
2010 about the transactions we conducted to stabilize markets during the recent
financial crisis, restore the flow of credit to American families and businesses,
and support economic recovery and job creation in the aftermath of the crisis. We
will also address our March 2011 release, under the Freedom of Information
Act, of documents regarding the use of the Federal Reserve’s discount
window during the crisis.
The role of lender of last resort is a critical responsibility long filled
by central banks around the world. Central bank lending facilitates the
implementation of monetary policy and allows the central bank to address short-term
liquidity pressures in the banking system. During normal times, the Federal
Reserve's discount window provides a backup source of liquidity for depository
institutions in sound financial condition to address unexpected, short-term
funding pressures. In doing so, the discount window facilitates the smooth
and efficient flow of credit to U.S. households and businesses. In periods
of crisis, the discount window is a tool that can be used to support market
liquidity, and thereby mitigate strains in financial markets that could otherwise
escalate and lead to sharp declines in output and employment. All discount
window loans are fully secured and the Federal Reserve has not suffered a loss
on any discount window loans.
Disclosure and Integrity of the Federal Reserve’s Financial Statements
Since it began operation in 1914, the Federal Reserve has published full financial
statements. We release our balance sheet every week, both by individual
Reserve Bank and on a consolidated basis for the entire Federal Reserve System.
1
In
addition, the Federal Reserve publishes annual financial statements with information
on our assets and liabilities as well as income and expenses in the same detail
as a publicly traded corporation.
2
During the recent financial crisis, the Federal Reserve expanded its weekly
balance sheet disclosures to include information about the amount of credit
outstanding under each of the credit facilities established during the crisis. The
Federal Reserve also initiated in June 2009 a special monthly report, which
we provide to the Congress and publish on the Board’s website, that provides
additional detail about the Federal Reserve’s emergency lending programs,
including information on the amount of lending under each program, a description
of the type and level of collateral associated with those loans, and information
about the borrowers under those facilities.
3
This
report includes aggregate information about credit provided to depository institutions
through the discount window as well as information on the Federal Reserve’s
securities holdings and the holdings of Maiden Lane, Maiden Lane II, and Maiden
Lane III. The Board’s website also contains detailed information
about the terms and conditions of each of the emergency lending programs, the
availability of discount window lending, the swap lines opened with foreign
central banks, and the arrangements with third-party vendors used by the System
during the financial crisis, as well as expansive data and numerous reports
and other information on all aspects of Federal Reserve operations.
4
The Federal Reserve Bank of New York (FRBNY) also maintains a website that
offers detailed information on open market operations taken to implement the
monetary policy decisions of the Federal Open Market Committee. This
information includes schedules of purchases and sales of securities as part
of open market operations with CUSIP information describing the securities
involved. With this information, a description of every open market operation
can be examined shortly after it is conducted. Other open market information
available on the FRBNY website includes summary and individual data on the
securities held in the System Open Market Account and information about the
federal funds rate.
5
The
site also contains a great deal of additional data related to FRBNY operations,
including the names of the primary dealers, some legal forms for transacting
business, and other information about fiscal agency activities on behalf of
the U.S. Treasury.
The Federal Reserve’s annual financial statements are audited by an independent
public accounting firm, which performs customary procedures to assure their
accuracy and integrity. For the last four years, for example, Deloitte
and Touche has audited the financial statements of the Federal Reserve Board
and the Federal Reserve System as a whole. In each year, the Federal
Reserve has received a clean auditor opinion, meaning that the financial statements
present fairly the financial positions of the Federal Reserve. Further,
the external auditor also opines that the Federal Reserve has maintained effective
internal controls over financial reporting. The independent audit also
covers transactions conducted through each of the special lending facilities
established by the Federal Reserve under section 13(3) of the Federal Reserve
Act and the financial statements of Maiden Lane, Maiden Lane II, and Maiden
Lane III, as well as the transactions conducted through the discount window
and with foreign central banks. By statute, the Board’s Office
of Inspector General (OIG) is responsible for ensuring that the auditor and
the audits are independent. The results of these financial audits are
reported annually to the Congress along with the audited financial statements
of the Federal Reserve System and published on the Board’s website.
6
The
OIG also has conducted its own review of the special lending facilities established
under section 13(3) of the Federal Reserve Act.
In addition to these audits, the Federal Reserve, and in particular, the
special lending facilities established by the Federal Reserve during the recent
financial crisis, have been subject to a number of other audits and reviews. These
include special audits by the Office of the Special Inspector General for the
Troubled Asset Relief Program for each program that involved any funding from
the TARP program.
7
The
Congressional Oversight Panel and the Financial Crisis Inquiry Commission also
conducted reviews and both have issued public reports.
8
Moreover, the Federal Reserve’s financial statements and a broad range
of our functions are subject to review by the Government Accountability Office
(GAO). For example, in recent years the GAO has conducted reviews of
the policies and practices of the Federal Reserve in its supervision and regulation
of bank holding companies, state-chartered banks that are members of the Federal
Reserve System, and other banking organizations. It has also conducted
reviews of the Federal Reserve in other areas, including our oversight and
operation of payment systems; our implementation and enforcement of consumer
protection laws; our policies on the acquisition of U.S. banking organizations
by sovereign wealth funds; our efforts to address cyber security; and the need
for financial regulatory reform. These reviews are not limited to auditing
the integrity of the financial statements or public reporting of these activities. Rather,
the GAO reviews the development of policies and provides assessments of and
suggestions regarding appropriate policies.
In response to a directive from the Congress in the Dodd-Frank Act, the GAO
is currently conducting a special review of all loans and other Federal Reserve
transactions between December 1, 2007, and July 21, 2010, under the special
lending facilities and other programs developed during the financial crisis.
9
This
review will assess operational integrity, internal controls, security and collateral
policies, policies governing third-party contractors, and the existence of
any conflicts of interest or inappropriate favoritism in the establishment
or operations of the facilities.
10
The
Federal Reserve is fully cooperating with the GAO in its conduct of this extensive
review and will continue its close cooperation with the GAO to assist in its
reviews of Federal Reserve functions generally.
Recent Information
Releases
As provided by the Dodd-Frank Act, on December 1, 2010, the Board published
detailed information on its website about the Federal Reserve’s actions
during the financial crisis, including transactions to stabilize markets, restore
the flow of credit to American families and businesses, and support economic
recovery and job creation in the aftermath of the crisis.
11
Many
of these transactions, conducted through a variety of broad-based lending facilities,
provided liquidity to financial institutions and markets through fully secured,
mostly short-term loans. Purchases of agency mortgage-backed securities
(MBS) supported mortgage and housing markets, lowered long-term interest rates,
and fostered economic growth. Dollar liquidity swap lines with foreign
central banks helped stabilize dollar funding markets at home and abroad. Other
transactions provided liquidity to particular institutions whose disorderly
failure during the financial crisis could have severely stressed an already
fragile financial system.
12
The
Federal Reserve followed sound risk-management practices in administering all
of these programs, most of which ended during 2010. The Federal Reserve
has incurred no credit losses to date on these programs, and does not expect
to incur any credit losses on the few programs still outstanding.
In the December 1 data release, the Federal Reserve provided vast amounts
of information about the programs and the terms and conditions of the individual
transactions made under them. The information provided detailed explanations
as well as definitions of the material terms for each facility. Data
concerning the material terms were made available in multiple formats, including
Excel files that allow users to search, sort, and filter the data for each
program in multiple categories. For the broad-based lending facilities,
details included the name of the borrower, the amount borrowed, the date the
credit was extended, the interest rate charged, information about collateral,
and other relevant credit terms. Similar information was provided for
the draws of foreign central banks on their dollar liquidity swap lines with
the Federal Reserve. For agency MBS transactions, details included the
name of the counterparty, the security purchased or sold, and the date, amount,
and price of the transaction.
In addition, as mandated by the Dodd-Frank Act, the Board’s website directly
links to the Federal Reserve’s audit-related information, including GAO
reports, annual audited financial statements, and reports related to emergency
lending authority provided to the Congress.
13
The
Board has also charged staff with identifying other information that could
be posted to this site that would help to explain the accounting, financial
reporting, and internal controls of the Board and the Reserve Banks.
On March 31, 2011, the Federal Reserve released documents related to the discount
window in response to requests filed by Bloomberg L.P. and Fox News Network
LLC under the Freedom of Information Act. Discount window lending under
section 10B of the Federal Reserve Act offers secured, short-term loans from
the Reserve Banks to depository institutions located in the lending Reserve
Bank’s district. The March 31 release included documents containing
information related to borrowers at the discount window between August 8, 2007,
and March 1, 2010, that was not required to be disclosed under the Dodd-Frank
Act.
Future Information Disclosures
Going forward, the Dodd-Frank Act provides for the release of information on
any broad-based emergency lending facility one year after the termination of
the facility. The act also provides for the release of information regarding
discount window lending and open market operations conducted by the Federal
Reserve after July 21, 2010, with a two-year lag. For lending facilities
(including both emergency lending facilities and the discount window) and for
open market operations, the Federal Reserve will publish information disclosing
the identity of the borrower or counterparty, transaction amount, interest
rate or discount paid, and collateral pledged.
The Federal Reserve believes that the lags provided by the Dodd-Frank Act
for the release of transaction-level information about open market operations,
emergency lending facilities, and discount window lending activities establish
an important balance between the public’s interest in information about
participants in transactions with the Federal Reserve and the need to ensure
that the System can effectively use its congressionally authorized powers to
maintain the stability of the financial system and implement monetary policy. We
remain concerned that a more rapid release of information about borrowers accessing
the discount window and emergency lending facilities could impair the ability
of the Federal Reserve to provide the liquidity needed to ensure the smooth
working of the financial system. If institutions believe that publication
of their use of Federal Reserve lending facilities will impair public confidence
in the institution, then institutions may choose not to participate in these
facilities. Experience has shown that banks’ unwillingness to use
the discount window can result in more volatile short-term interest rates and
reduced financial market liquidity that, in turn, can contribute to declining
asset prices and reduced lending to consumers and small businesses.
We will
carefully monitor developments in the use of the discount window and other
Federal Reserve facilities and keep the Congress informed about their effectiveness.
Conclusion
The Federal Reserve has worked and will continue to work with the Congress
to ensure that our operations promote the highest standards of accountability,
stewardship, and policy effectiveness, consistent with meeting our statutory
responsibilities. We appreciate the opportunity to describe the Federal
Reserve’s efforts on this important subject and are happy to answer any
questions you may have.
__________________________________________
1
This information
is published each Thursday, for the week ending the preceding Wednesday,
through the Federal Reserve’s H.4.1 Statistical Release, “Factors
Affecting Reserve Balances of Depository Institutions and Condition Statement
of Federal Reserve Banks.” The current release, as well as
past releases dating from 1996, is available on the Board’s website
at
www.federalreserve.gov/releases/h41/default.htm
.
The website also
provides descriptive information and an interactive guide for each table
in the release.
2
This information
is included in the Board’s annual report, which is submitted to the
Congress each spring and published on the Board’s website at
www.federalreserve.gov/boarddocs/rptcongress
.
3
See
the
Monthly
Report on
Credit
and Liquidity Programs and the Balance Sheet
,
available
at
www.federalreserve.gov/monetarypolicy/clbsreports.htm
.
For more information on the various Federal Reserve liquidity and credit
facilities and further background on the Federal Reserve’s balance
sheet, see www.federalreserve.gov/monetarypolicy/bst.htm.
4
The
Board’s
website is at
www.federalreserve.gov
.
5
FRBNY’s
website is at
www.newyorkfed.org
.
See
www.newyorkfed.org/markets/openmarket.html
for
information about open market operations.
6
The
latest
Annual
Report of the Board of Governors of the Federal Reserve System
is
available on the Board’s website at
www.federalreserve.gov/boarddocs/rptcongress
.
7
See
www.sigtarp.gov/audits.shtml
.
8
See
Congressional Oversight Panel (2011),
March Oversight Report—The
Final Report of the Congressional Oversight Panel
(Washington: GPO,
March 16),
www.gpo.gov/fdsys/pkg/CHRG-112shrg64832/pdf/CHRG-112shrg64832.pdf
;
The
Financial Crisis Inquiry Commission (2011),
The Financial Crisis
Inquiry Report
(Washington: GPO, January),
www.gpoaccess.gov/fcic/fcic.pdf
.
9
This
audit is being undertaken pursuant to section 1109 of the Dodd-Frank
Act and is to be completed in July 2011.
10
See
31 U.S.C. § 714(f).
11
See section
1103(b) of the Dodd-Frank Act. The data released on December 1, 2010,
included transaction-level information about the following programs:
the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity
Facility (AMLF); the Term Asset-Backed Securities Loan Facility (TALF);
the Primary Dealer Credit Facility (PDCF); the Commercial Paper Funding
Facility (CPFF); the Term Securities Lending Facility (TSLF); the TSLF
Options Program (TOP); the Term Auction Facility (TAF); agency MBS purchases;
dollar liquidity swap lines with foreign central banks; assistance to
Bear Stearns, including Maiden Lane; and assistance to American International
Group, including Maiden Lane II and III. The information can be found
on the Board’s
website at
www.federalreserve.gov/newsevents/press/monetary/20101201a.htm
.
12
The
Dodd-Frank Act has substantially modified the ability of the Federal Reserve
to extend emergency credit to single identified non-banking companies.
Now, credit under section 13(3) of the Federal Reserve Act may only be
offered through credit facilities with broad-based eligibility.
13
See
www.federalreserve.gov/newsevents/reform_audit.htm
.
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