Transcripts of the monetary policymaking body of the Federal Reserve from 2002–2008.

In terms of the size of the cushion, we did speak with SCRM (Subcommittee on Credit Risk Management) a bit about this, and, of course, there is a variety of views there; and across the System, as we look at the loans that are outstanding, there is a range of collateral that is used. A good portion of the collateral that is used is not priced securities; it is loans, many of which we do not have the details on, so it is very difficult to establish a good value. Then, even behind that in quality are nonpriced securities, and we have increasingly seen more of those pledged to us in these times. So we felt, because it is difficult for us to feel really comfortable with the values of some of these pledged instruments, that taking the cushion did seem appropriate. For what it is worth, of the more than $150 billion of loans that we have outstanding, they fall short of being collateralized by this extra margin by only about $200 million. So virtually all the value can be overcollateralized.

Now, it is not quite so pleasing a picture if you look at it by the number of borrowers outstanding. Of the 140 or some borrowers outstanding, maybe 25 of them are short some margin of collateral, if you would impose the 25 percent overcollateralization. But, again, the values are quite small, even in percentage terms, for institutions. So as we try to balance, on the one hand, our comfort with some of the collateral we are taking and our ability to value it with, on the other, the longer term, we look to the preference of many in the reserve community who have dealt with institutions whose quality has deteriorated. We felt we might be doing best by the vast majority of Reserve Banks if we were to introduce the cushion.

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