Executive Summary

Executive Summary

• The Federal Reserve Board (Fed) recently issued a proposed rule regarding Regulation A (Extensions of Credit by Federal Reserve Banks). Section 1101 of the Dodd Frank Act amended the Fed's emergency lending authority in section 13(3) of the Federal Reserve Act (FRA). This proposed rule would implement the Dodd-Frank Act changes and was developed in consultation with the U.S. Treasury.

• Specifically, this proposed rule is intended to ensure that the Fed’s emergency lending program or facility is for the purpose of providing liquidity to the financial system, and is not to aid an individual failing financial company. These changes are not intended to affect discount window lending to depository institutions, such as banks and credit unions, because much of that statutory framework is contained in section 10B of the FRA.

• Effective July 21, 2010, the Dodd-Frank Act amended section 13(3) of the FRA to:

&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp1. Remove the Fed’s general authority to lend to an individual, partnership, or corporation, and limit the Fed’s emergency lending to extending credit to participants in a program or facility with broad-based eligibility;

&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp2. Require the Fed to obtain the approval of the Treasury Secretary prior to extending emergency credit under section 13(3) of the FRA;

&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp3. Provide that a program or facility structured to remove assets from the balance sheet of a single and specific company, or is established to assist a single company avoid bankruptcy, would not be considered broad-based; and

&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp4. Require the Fed, in consultation with the Treasury Secretary, to adopt policies and procedures to ensure emergency lending is for the purpose of providing liquidity to the financial system, and not to aid a failing company; the security for such loans is sufficient to protect taxpayers from losses; any such program or facility is terminated in a timely and orderly way; a Reserve Bank assigns a lendable value to collateral; and borrowing by insolvent entities is prohibited.

• Comments for the proposed rule are due to the Fed by March 7, 2014; please submit your comments to CUNA by February 24, 2014.

• If you have any questions or comments, please contact CUNA Assistant General Counsel for Regulatory Research Dennis Tsang at dtsang@cuna.com.

• For further details, please see the Fed’s proposed rule.

Summary of Proposed Rule

• Section 201.3 - There is no obligation for the Federal Reserve Bank to extend credit to any person or entity.

• Section 201.4(d) Emergency credit for others. –

(1) Authorization to extend credit.

&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp(i) In unusual and exigent circumstances, the Fed, generally by the affirmative vote of not less than five members, may authorize any Federal Reserve Bank, subject to conditions and periods, to extend credit to any participant in a program or facility with broad-based eligibility.

&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp(ii) The Fed may not establish any program or facility without obtaining the prior approval of the Treasury Secretary.

&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp(iii) At the time of authorization to extend credit, or soon thereafter, the Fed will document the justification for its authorization, and will make appropriate public disclosures.

(2) Broad-based eligibility; insolvency.

&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp(i) A program or facility established must have broad-based eligibility, which is designed to provide liquidity to an identifiable market or sector of the financial system; is not to aid a failing financial company and not structured to remove assets from the balance sheet of a company; and is not established to assist a single and specific company to avoid bankruptcy, resolution under Title II of the Dodd-Frank Act, or any other insolvency proceeding.

&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp(ii) A Federal Reserve Bank may extend credit through a program or facility with broad-based eligibility through such mechanism or vehicle as the Fed determines would facilitate the extension of such credit.

&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp(iii) A Federal Reserve Bank may not extend credit through a program or facility to any person or entity that is “insolvent.”

(3) Indorsement or other security.

&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp(i) All credit extended under a program or facility must be indorsed or otherwise secured to satisfaction of lending Federal Reserve Bank.

&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp&nbsp(ii) In determining whether an extension of credit under any program or facility is secured to its satisfaction, a Federal Reserve Bank must, prior to or at the time credit is initially extended, assign a lendable value to all collateral, consistent with sound risk management and to protect the taxpayer.

(4) The Fed will periodically review the existence of unusual and exigent circumstances; extent of usage of program or facility; extent to which continuing authorization facilitates confidence in financial markets; economic and market conditions; financial market; ongoing need for liquidity support; and other factors.

(5) Each lending Federal Reserve Bank must obtain evidence participants in a program or facility are unable to secure adequate credit from other institutions.

(6) The Fed will comply with required reporting requirements.

(7) There is no obligation for Federal Reserve Banks to extend credit.

(8) In unusual and exigent circumstances and after consultation with the Fed, a Federal Reserve Bank may extend short-term emergency credit, if the collateral used to secure such credit consists solely of obligations of, or obligations fully guaranteed as to principal and interest by, the U.S. or an agency.

Questions to Consider Regarding the Proposal

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* 1. Does your credit union support the proposed regulatory changes to implement the Dodd-Frank Act amendments that limit the Fed’s emergency lending program or facility for the purpose of providing liquidity to the financial system and prohibit the Fed from aiding an individual failing financial company?

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* 2. While this proposed rule addresses emergency lending and is not intended to affect discount window lending to depository institutions, do you have any comments on the Fed’s discount window lending for credit unions?

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* 3. Any other concerns, comments, or suggestions?

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* 4. (Optional) What is your credit union's asset size?

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* 5. (Optional) Please provide information about yourself and your credit union.

Thank you for your input and time - CUNA Regulatory Advocacy Team
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