Fed to trim most margins on direct loans to banks

By Reuters Staff
August 19, 2009

WASHINGTON/NEW YORK, Aug 19 (Reuters) – The U.S. Federal Reserve said on Wednesday it will trim the margins for most securities banks pledge to obtain loans from its discount window and Term Auction Facility.

The Fed’s easing of loan margins means banks will obtain more cash on low-risk collateral such as Treasuries and foreign government bonds.

Details on the changes, effective Oct. 19, 2009, are posted at the Fed’s discount window Web site.

The changes stem from a multiyear review of collateral valuation by the Fed and “should not be viewed as a response to the financial crisis,” the Fed said in a statement.

For example, a bank will be able to pledge a two-year Treasury note and get an overnight loan from the Fed worth 99 percent of its market value. Under the Fed’s current margin requirements, the bank can obtain such a loan worth 98 percent of the two-year note’s market value.

This lowering of the central bank’s margin requirements will make it easier for banks to obtain emergency cash even though credit conditions have improved since the height of the financial crisis last fall, analysts said.

“It’s a plus for the economy and markets. The reduction in margin requirements will help,” said Kenneth Kim, an economist at Stone & McCarthy Research Associates in Princeton, New Jersey.

While it will relax the margins on many collateral types, the Fed will increase the requirements on some riskier securities that still face default risks amid a weak economy.

For instance, a bank that will pledge a mid-investment grade two-year asset-backed security will obtain a loan worth 89 percent of the market value of the security. This compares with 97 percent under the current margin schedule.

An asset-backed security is backed by a pool of consumer or small business loans.

Under the new requirements, less than 6 percent of banks that have discount window loans would be required to increase their collateral pledge or pay them down, the Fed said. (Reporting by Richard Leong; Editing by Dan Grebler)

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