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

Thank you. I will discuss at a high level some of the operational aspects of the auction credit facility. Yesterday, SCRM (Subcommittee on Credit Risk Management) members and discount window officers at your Reserve Banks talked together about the operational details. Although they have had only hours to learn and to think about this, they seem to be comfortable with the basics and are helping to work out the open items.

So, how would this work? First, the watchwords for implementing this program would be “simple and robust.” This means employing many of the procedures that we already use locally to extend discount window credit. The discount staffs have the necessary expertise to receive and to screen bid information. The local Reserve Bank staff members are in the best position to know the bidders in their District. They would use many of the same procedures they use to accept discount window loan requests. The applications we use to determine adequate collateralization for discount window loan requests would be used to determine acceptability of auction bids, with a supplemental calculation to screen for the excess of collateralization we would be requiring for ACF credit. The discount window “hotline” telephone infrastructure—a number with multiple lines known to depository institutions (DIs) in each District— would be used for Reserve Bank staff to receive and confirm bids and awards from DIs in the District. The SCRM members and discount window officers are working now with Board staff members on a communication plan for outreach to DIs should this facility be implemented.

Let me now walk you briefly through the auction cycle that is in the handout. We have been contemplating that on Friday at noon the Board would announce the terms of the next auction. It would include, for example, “On Monday, October 1, 2007, there will be an auction for up to $20 billion of twenty-eight-day funds, to be issued on Thursday, October 4, 2007. Bids may be submitted to local Reserve Banks between times X and Y on the auction date. The minimum bid size will be $50 million, and the minimum bid rate will be Z percent. The auction results will be announced on Wednesday, October 3, at 10 a.m. eastern time.” Details pertaining to the eligibility, the bidding, and the award procedures would be defined in an announcement posted to the Board of Governors’ website, and discount window staff would be available on the announcement date to answer calls to their local hotlines regarding the terms of the specific auction. On the morning of the auction date (typically a Monday), the Reserve Bank staff would perform the necessary calculation to determine the maximum bid size for the eligible DIs in their District, based on collateral pledged. Also on the auction date, Reserve Bank staff members would receive and confirm or reject phone bids during the announced bidding window, following defined procedures. After the close, the Reserve Bank staff would submit formatted information to the auction agent by encrypted e-mail. Next, the auction agent would combine the information from the individual Reserve Banks. A first step would be to constrain the separate bids from branches of the same foreign banking organization to comply with single-bidder rules.

The administration of the other elements of the auction allocation is straightforward. A predefined process would award partial allocations at the stop-out rate when bidding at this rate exceeds the maximum amount expressed in the auction announcement. The auction agent would communicate the awards back to Reserve Banks on Tuesday afternoon, and the Reserve Bank staff would check these against the stop-out rate information that the auction agent provides. On Wednesday, the Board would publicly announce the auction results and post this information to its website. At that point, Reserve Banks would begin to notify the DIs in their respective Districts that submitted winning bids of the awards they would receive the following day and the rate they would be charged. On Thursday, Reserve Banks would post the term credit to the automated application that they currently use for extensions of credit. Unless otherwise requested by the DI, the credit would be posted to the DI’s reserve account at the end of the day.

I have covered most, if not all, the details in the table of auction terms and the auction dateline that are in your handout, and I will turn to Karen to continue our presentation.

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