No Changes Recommended to Freedom of Information Act Exemption Included in the Amended Federal Reserve Act

Introduction

Objectives

The Freedom of Information Act (FOIA) creates a right of public access to the records of federal agencies, including the Board of Governors of the Federal Reserve System (Board) and the Federal Open Market Committee (FOMC). Federal agencies must release records (or portions thereof) that are requested by the public unless these records are excluded from FOIA or fall under one of the nine FOIA exemptions. To enhance the public's access to Federal Reserve System (Federal Reserve) information, section 1103 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) amended the Federal Reserve Act (FRA) by adding section 11(s). Under section 11(s), the Board is required to publicly disclose detailed transaction-level information concerning the Federal Reserve's emergency credit facilities, discount window lending programs, and open market operations. To allow these programs to function effectively, however, section 11(s) authorizes the Board to delay the disclosure of this information for designated time frames. Further, section 11(s) provides a FOIA exemption that exempts these records from release to the public until the mandated disclosure dates.

Section 1103 of the Dodd-Frank Act requires that the Office of Inspector General (OIG) of the Board study this FOIA exemption. Specifically, the OIG is to

1. study the impact that the FOIA exemption has had on the public's ability to access information about the Board's administration of emergency credit facilities, discount window lending programs, and open market operations
2. make any recommendations on whether the FOIA exemption should remain in effect
3. submit a report on the findings of its study to the Committee on Banking, Housing, and Urban Affairs of the United States Senate and the Committee on Financial Services of the U.S. House of Representatives

We conducted this evaluation and prepared this report to fulfill these statutory requirements. Details on our scope and methodology are in appendix A, and the nine FOIA exemptions are listed in appendix B.

Background

The Federal Reserve's Emergency Credit Facilities, Discount Window Lending Programs, and Open Market Operations

Consistent with its role as the nation's central bank, the Federal Reserve took action to respond to the financial crisis of 2007-2009 by providing liquidity to the private sector, supporting the functioning of credit markets, and reducing financial strains.¹ Under section 13(3) of the FRA,² the Board authorized the Federal Reserve Bank of New York (FRB-NY) and the Federal Reserve Bank of Boston to create emergency credit facilities with broad-based eligibility and for specific institutions. This exercise of authority under unusual and exigent circumstances, coupled with modifications to the Board's more traditional tools (e.g., discount window lending program and open market operations), was followed by calls for increased transparency surrounding the Board's actions. In addition, there were requests from the public under FOIA for information related to these actions, such as borrowers' names, loan amounts, and pledged collateral. The Federal Reserve provided information about the interest rates and other terms of these programs, the amounts lent, and the eligibility criteria for participants, as well as regular status reports. However, the Board withheld transaction-level information using existing FOIA exemptions due to concerns that the release of this information would harm the effectiveness of these tools.³

On July 21, 2010, Congress enacted the Dodd-Frank Act, in part, to address a variety of issues raised by the financial crisis and to promote increased transparency. Among other things, the Dodd-Frank Act amended the FRA by adding section 11(s). The Board's disclosure requirements under section 11(s) of the FRA, and the related FOIA exemption, apply to three types of Federal Reserve activities: emergency credit facilities, discount window lending programs, and open market operations. The following describes each of these activities and how each is used by the Federal Reserve.

Emergency Credit Facilities

Pursuant to section 13(3) of the FRA, the Board authorized the following six emergency credit facilities with broad-based eligibility to stabilize the financial system and support economic activity:

Facility	Purpose
Term Securities Lending Facility	Designed to promote liquidity in the financing markets for U.S. Treasury and other securities and, thus, foster the functioning of financial markets more generally. Loaned U.S. Treasury securities to primary dealers against eligible collateral.
Primary Dealer Credit Facility	Intended to provide primary dealersa with the ability to obtain overnight loans using eligible assets as collateral to secure such loans. Before the creation of this facility, primary dealers had no access to a "lender of last resort" credit facility.
Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility	Intended to address liquidity strains faced by money market mutual funds and borrowers in the commercial paper markets and assist money market mutual funds in meeting investor redemption demands.
Commercial Paper Funding Facility	Intended to increase the liquidity of the commercial paper markets and provide an immediate funding source for companies, allowing them to continue to finance day-to-day operations, such as payroll, purchasing, and lending.
Money Market Investor Funding Facility	Intended to restore confidence and liquidity in the money markets, which are critical to the short-term financing needs of businesses. This facility was never utilized.
Term Asset-Backed Securities Loan Facility (TALF)	Intended to assist the credit markets in meeting the credit needs of consumers and businesses by facilitating the issuance of asset-backed securities backed by pools of assets--such as auto loans, credit card loans, equipment loans, student loans, or small-business loans--and improving the market conditions for asset-backed securities more generally.b

^a Firms that are authorized to buy and sell U.S. government securities with FRB-NY's Open Market Desk, which operates on behalf of the FOMC, in order to implement monetary policy.
^b Only the TALF has outstanding loans. As of October 31, 2012, these loans totaled approximately $1.2 billion, and they are scheduled to mature no later than March 2015, according to the TALF terms and conditions. The other facilities' loans were repaid in full with interest.

In addition to its broad-based emergency lending, the Board authorized assistance to avert the disorderly failures of institutions, such as the Bear Stearns Companies, Inc., and American International Group, Inc. (AIG).⁴ Board officials believed that disorderly failures could have further strained the financial system as a whole and harmed the U.S. economy.

Discount Window Lending Programs

In addition to creating emergency credit facilities, the Federal Reserve modified the terms of discount window lending, one of its traditional monetary policy tools. Discount window lending (1) helps achieve the target federal funds rate,⁵ (2) serves as a safety valve by relieving pressure in markets for federal funds, and (3) helps promote basic stability of the payment system. Each Federal Reserve Bank (Reserve Bank) uses its discount window to extend primary credit on a short-term basis to eligible depository institutions in its district at rates above the FOMC's target federal funds rate.

Depository institutions eligible for primary credit at the discount window include certain commercial banks, thrift institutions, and U.S. branches and agencies of foreign banks in generally sound financial condition. The Reserve Banks generally determine eligibility for credit according to criteria based mainly on the borrower's examination ratings and capital levels. Loans from the discount window must be secured by collateral acceptable to the lending Reserve Bank, and most performing or investment-grade assets held by depository institutions are acceptable. Given the above-market pricing for credit, the Federal Reserve expects that institutions will use the discount window as a backup source of funding. The central banks of most industrialized countries have similar lending facilities that extend collateralized credit at an above-market rate.

During the financial crisis, the Federal Reserve made several modifications to its discount window lending programs to help relieve liquidity strains in depository institutions and in the banking system as a whole, including lowering the primary credit rate and extending the maximum term on primary credit loans. In addition, in December 2007 the Federal Reserve created the Term Auction Facility (TAF) to improve depository institutions' access to term funding (i.e., funding that is longer than overnight). The TAF provided credit through an auction mechanism to depository institutions in generally sound financial condition.

Open Market Operations

The Federal Reserve considers open market operations to be its primary monetary policy tool. The principal goal of open market operations is to affect the federal funds rate, which impacts other rates throughout the economy, by influencing the amount of reserve balances in the banking system. The Federal Reserve has traditionally sold or purchased securities, primarily U.S. Treasury securities and federal agency securities, either in outright purchases or sales or through repurchase agreements,⁶ in the open market using primary dealers. By adjusting the level of reserve balances,⁷ the Federal Reserve influences the federal funds rate as shown by the following diagram.

In addition, to address heightened pressures in term funding markets during the financial crisis, the Federal Reserve conducted a series of what were called single-tranche term repurchase agreements from March 2008 to December 2008. These repurchase agreements provided funding to primary dealers for up to 28 days to help address liquidity pressures across a number of financing markets and supported the flow of credit to U.S. households and business. Furthermore, since late 2008 the FOMC has used large-scale asset purchases of Treasury, agency, and agency-backed securities to put downward pressure on longer-term interest rates and ease financial conditions more broadly.

Disclosure Requirements of the FRA

Congress enacted the Dodd-Frank Act, in part, to address a variety of issues raised by the financial crisis and to promote increased transparency. The Dodd-Frank Act amended the FRA by adding section 11(s) to enhance the public's access to Federal Reserve-related information in several ways. For example, it requires the Board to publicly disclose specified information concerning the borrowers and counterparties participating in emergency credit facilities, discount window lending programs, and open market operations that are authorized or conducted by the Board or a Reserve Bank. The specific information required for disclosure under section 11(s) of the FRA includes

• the names and identifying details of each borrower, participant, or counterparty in any credit facility or covered transaction ⁸
• the amount borrowed by or transferred by or to a specific borrower, participant, or counterparty in any credit facility or covered transaction
• the interest rate or discount paid by each borrower, participant, or counterparty in any credit facility or covered transaction
• information identifying the types and amounts of collateral pledged or assets transferred in connection with participation in any credit facility or covered transaction

The Dodd-Frank Act amendments to the FRA require the release of this borrower and counterparty (transaction-level) information but permit a delay of this release to allow these emergency credit facilities, discount window lending programs, and open market operations to function effectively. For emergency credit facilities, public disclosure is required one year after the effective date of the termination by the Board of the authorization of the credit facility. For discount window lending programs and open market operations transactions, the Board is required to disclose the information on the last day of the eighth calendar quarter following the calendar quarter in which these transactions were conducted.

The Dodd-Frank Act amendments to the FRA include a FOIA exemption to allow for this transaction-level information to be kept confidential until the relevant mandatory release dates. Section 11(s) of the FRA provides the Chairman of the Board with the authority to publicly release this information earlier "if the Chairman determines that such disclosure would be in the public interest and would not harm the effectiveness of the relevant credit facility or the purpose or conduct of covered transactions."

• 1. The FRA created the Federal Reserve as the central bank of the United States to provide the nation with a safer, more flexible, and more stable monetary and financial system. The Federal Reserve is composed of the Board, 12 regional Federal Reserve Banks, and the FOMC.   Return to text
• 2. Section 13(3) of the FRA--A section of the FRA that, prior to the enactment of the Dodd-Frank Act, read, in part, as follows: "In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System . . . may authorize any Federal reserve bank . . . to discount for any individual, partnership, or corporation, notes, drafts, and bills of exchange . . . [that are] . . . secured to the satisfaction of the Federal reserve bank: Provided . . . that such individual, partnership, or corporation is unable to secure adequate credit accommodations from other banking institutions. All such discounts for individuals, partnerships, or corporations shall be subject to such limitations, restrictions, and regulations as the Board of Governors of the Federal Reserve System may prescribe."   Return to text
• 3. On March 31, 2011, in response to two opinions of the United States Court of Appeals for the Second Circuit, the Federal Reserve released documents related to the discount window. Bloomberg, L.P.v. Bd. of Governors of the Fed. Reserve Sys., 601 F.3d 143 (2d Cir. 2010); Fox News Network, LLC v. Bd. of Governors of the Fed. Reserve Sys., 601 F.3d 158 (2d Cir. 2010).   Return to text
• 4. The loans authorized by the Board, and extended by FRB-NY, as part of the assistance to AIG and to facilitate the acquisition of the Bear Stearns Companies, Inc., have been repaid in full with interest. The Dodd-Frank Act amended section 13(3) of the FRA so that the Board may no longer use this provision to authorize a loan or other financial assistance to a single and specific company.   Return to text
• 5. The FOMC targets the overnight uncollateralized lending rate between banks, known as the federal funds rate.   Return to text
• 6. A repurchase agreement is a financial transaction in which the holder of a security obtains funds by selling that security to another financial market participant under an agreement to repurchase the security at a fixed price on a predetermined future date.   Return to text
• 7. Depository institutions hold reserve balances at a Reserve Bank to meet their reserve requirements with the Federal Reserve and to clear financial transactions with other financial institutions. Reserve requirements are the percentage of certain deposits that depository institutions must hold in reserve in the form of cash or in an account at a Reserve Bank.   Return to text
• 8. A covered transaction is defined as including two different transactions: (1) open market operation transactions with a nongovernmental third party conducted under the first undesignated paragraph of section 14 of the FRA, or subparagraph (a), (b), or (c) of the second undesignated paragraph of the same section; and (2) discount window advances made under section 10B of the FRA after the date of enactment of the Dodd-Frank Act (i.e., July 21, 2010).   Return to text