On June 3, 2014, the Federal Reserve announced new collateral margins for discount window lending and payments system risk purposes. The new margins are effective July 1, 2014, and are available at frbdiscountwindow.org. In general, aggregate collateral values are slightly lower and the collateral value of loans is affected more than securities under the new margins. Of course, the exact effect of the change in margins on a depository institution depends on the specific type of collateral it pledges.
In the rest of the article, we describe the rationale for the change, the general nature and effects of the change and our plans for working with institutions on the transition.
The rationale for the change in margins is straightforward. As is the case for any lender, the taking of collateral is a central element of the Federal Reserve’s credit risk management practices. To determine how much to lend against collateral, the Federal Reserve has to value the collateral and then determine how much of a margin or “haircut” it will apply to the collateral. The Federal Reserve regularly reviews how it makes those valuations and determines those haircuts. These reviews can lead to changes in Federal Reserve valuation approaches and in related policies.
The new collateral margins announced this month are the result of the Federal Reserve’s periodic review of collateral valuation and margining practices, together with certain policy changes designed to add more granularity to determining lendable value for specifically pledged assets. Overall, the new margins reflect data and methodological enhancements that better account for the differences in various risk characteristics across collateral types.
In terms of the changes, the collateral categories listed in the margins table have been adjusted slightly; however, no changes have been made to the range of assets accepted as eligible collateral. Institutions will note fewer group deposited loan categories on the new margin table. The Federal Reserve previously announced that all pledged loans must be submitted in the individual deposited loan format by year-end 2014, except for student loans and credit card receivables. Group deposited loan margins will no longer be published for loan categories that must be pledged as individual deposited loans.
The most significant changes reflected in the new margin table are (a) the introduction of separate margins for fixed-rate and floating-rate individually deposited loans and (b) the discontinuation of valuation floors (a policy that resulted in the collateral value of individually deposited loans being greater than or equal to that of group deposited loans). The pro forma outcome of applying the new margin table to pledged collateral across all Federal Reserve districts in May 2014 shows a modest reduction in lendable value. The effect on individual depository institutions will vary depending on the specific composition and characteristics of the collateral pledged (asset category, maturity, coupon, etc.).
Ahead of the implementation date, Reserve Banks will be reviewing the pro forma collateral positions of depository institutions that routinely borrow under the System’s primary and seasonal lending programs and those institutions subject to payments system risk collateral requirements. The Minneapolis Federal Reserve Bank will be contacting select institutions, based on those reviews and on the absolute level of value change, during the month of June to discuss institution planned borrowing and collateral positions. Institutions can find more information regarding the new collateral margins within the Margin Announcement FAQs and the General Collateral FAQs located on the Discount Window & Payment System Risk website. Ninth District Institutions can also contact the Credit/PSR/Reserves section of the Division of Supervision, Regulation and Credit at 612-204-5855 or toll free at 877-837-8815.
