On July 30, 2008 FRB increased collateral requirements and today

...will they begin increasing the discount rate?

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Federal Reserve Introduces Collateral Requirement for Long-Term Advances

July 30, 2008

Effective July 30, 2008, the Federal Reserve is introducing a collateral requirement for advances of more than 28 days (“longer-term credit”). Under this requirement, the total amount of term primary credit and Term Auction Facility (“TAF”) credit with original or remaining term to maturity exceeding 28 days extended to an individual depository institution (“DI”) cannot exceed 75 percent of the lendable value of its available collateral.

This collateral requirement does not apply to the following:

Advances made before July 30, 2008
Advances with term to maturity of 28 days or less
Advances with term to maturity of 29 days but the 28th day of which is a holiday (see last question below)
Seasonal credit advances
For the purpose of clarification, such advances shall be secured to the satisfaction of the Reserve Bank as provided in Operating Circular No. 10 .



For new advances of longer-term credit, this requirement for additional collateral will be evaluated at the time of the loan request (or at the time of the Bid request, in the case of a TAF loan) and must be maintained while the advance has an original or remaining term to maturity of over 28 days. However, at the discretion of the Reserve Bank, this additional collateral may be used temporarily to secure short-term credit. If this additional collateral is used to support short-term credit, the DI must, within two business days, pledge more collateral to restore the requisite collateral requirement. If the DI does not pledge additional collateral within the timeframe, the Reserve Bank may require the DI to pay down some of its advances.

What is the reason for this collateral requirement?

The new collateral requirement for longer-term credit is designed in part to ensure that DIs retain some capacity to borrow to meet any unexpected short-term funding needs, and in part to protect against changes in the value of collateral and the creditworthiness of the DI over the longer-term advances that are currently available from the Federal Reserve. <MORE>

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