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On August 3, 2015, the Federal Reserve updated the collateral margins table used for discount window lending and payments system risk purposes. Collateral margins are advance rates that the Federal Reserve applies to the market value of pledged assets to determine the amount of credit available to the pledging depository institution (DI). As an example, a U.S. Treasury bill with a value of $100,000 would be multiplied by the 99 percent margin assigned to that asset type to determine that a DI could borrow up to $99,000. This article briefly summarizes the changes to the collateral margins and their impact on Ninth District DIs.
The Federal Reserve periodically updates collateral margins to better manage its market and credit risk. Better market data and improvements in valuation methodology drive the margin changes. The August update made adjustments to the overall margin rates and includes the following methodology changes:
- Eligible certificates of deposit (CDs) were previously limited to a maximum term of five years. CDs with terms of 5 to 10 years and over 10 years will now be eligible for pledging. The Federal Reserve will assign new margins to CDs based on length of term.
- DIs will now submit student loans as individually deposited loans instead of group deposited loans. The Federal Reserve margins will reflect time remaining until maturity and interest rate of each pledged loan.
The Federal Reserve of Minneapolis analyzed all Ninth District depository institutions’ discount window loans and payments system risk requirements relative to the pending change in collateral values. We notified any DI whose pledged collateral value was expected to be materially reduced or become insufficient. The overall impact on Ninth District institutions was minimal, with just a few institutions forecasted to have small valuation declines. However, some institutions saw collateral value increases as a result of the methodology changes.
We encourage all DIs to closely monitor their pledged collateral as it pertains to discount window access and collateralized intraday credit. The new collateral margins table and a list of eligible asset types are available at frbdiscountwindow.org. Ninth District institutions may also contact the Credit/PSR/Reserves section of the Division of Supervision, Regulation and Credit toll free at 877-837-8815.
