Recent Fed Actions Affect Financial Institutions
The Federal Reserve has taken a series of actions in recent days and weeks in an effort to stabilize the nation’s financial markets and economy. Several of these actions are particularly important to financial institutions.
Interest on reserves
The Financial Services Regulatory Relief Act of 2006 originally authorized the Federal Reserve to begin paying interest on balances held by or on behalf of depository institutions beginning Oct. 1, 2011. The recently enacted Emergency Economic Stabilization Act of 2008 accelerated the effective date to Oct. 1, 2008. Employing the accelerated authority, the Federal Reserve Board of Governors has approved a rule to amend Regulation D, which concerns the sale of securities, to direct the Federal Reserve Banks to pay interest on required reserve balances.
The interest rate paid on required reserve balances will be the average targeted federal funds rate established by the FOMC over each reserve maintenance period less 10 basis points.
By paying interest on required reserve balances, the opportunity cost of holding required reserves should be, for the most part, eliminated, which will help promote efficiency in the banking sector, the Board said.
While the amendments to Regulation D are effective immediately, the Fed's Board of Governors will accept public comments until Nov. 21, 2008.
Commercial Paper Funding Facility
"This facility should encourage investors to once again engage in term lending in the commercial paper market," the Board of Governors said in a statement. "An improved commercial paper market will enhance the ability of financial intermediaries to accommodate the credit needs of businesses and households."
The Federal Reserve noted that commercial paper has been under considerable strain in recent weeks as money market mutual funds and other investors, themselves often facing liquidity pressures, have become increasingly reluctant to purchase commercial paper. By eliminating much of the risk that eligible issuers will not be able to repay investors by rolling over their maturing commercial paper obligations, the CPFF should encourage investors to once again engage in term lending in the commercial paper market.
For more on recent Fed actions and details on particular actions, please see the related information.
October 17, 2008