Board Report: 2013-AA-B-001 January 18, 2013
We did not find evidence that the FOIA exemption included in section 11(s) of the amended FRA has impacted the public's ability to access information concerning the Board's administration of emergency credit facilities, discount window lending programs, or open market operations. We determined that neither the Board nor the FOMC has utilized the FOIA exemption in section 11(s) of the FRA to withhold information regarding any FOIA requests received from July 21, 2010, the date the exemption became effective, through October 31, 2012, the end of our FOIA review period. We also found that the Federal Reserve provides a significant amount of publicly available information about the administration of these facilities, programs, and operations that includes statutorily mandated disclosures. Published information also includes results of audits, broad-based reporting, program administrative terms and conditions, and aggregate data, such as weekly statistical reports and balance sheet information. In addition, we noted that if the FOIA exemption was eliminated, the earlier release of transaction-level information could have adverse impacts on individual institutions and the broader financial markets, as well as on the effectiveness of the emergency credit facilities, discount window lending programs, and open market operations as tools to effect monetary policy and respond to financial crises.
Given our determination that the FOIA exemption has not impacted the public's ability to access information about the Board's administration of emergency credit facilities, discount window lending programs, or open market operations, and the potential for adverse impacts from the earlier release of information, we are not recommending any change to the FOIA exemption that Congress provided in section 11(s) of the FRA.
We determined from our analysis of FOIA requests received by the Board and the FOMC that the FOIA exemption in section 11(s) of the FRA had not been used as of October 31, 2012. From the enactment of the Dodd-Frank Act on July 21, 2010, through October 31, 2012, the Board and the FOMC received a total of 2,033 FOIA requests,9 of which less than 1 percent pertained to activities related to the administration and operation of emergency credit facilities, discount window lending programs, or open market operations that would be covered by the FOIA exemption. However, we determined that neither the Board nor the FOMC has utilized the FOIA exemption provided in section 11(s) of the FRA to withhold information in response to any FOIA requests.
The FOIA exemption in section 11(s) of the FRA does not impact the public's ability to obtain documents concerning the emergency credit facilities, which are no longer operational, because transaction-level information for these facilities has already been released by the Board as required by statute. If any FOIA requests had been made for discount window lending programs and open market operations information from July 21, 2010, through October 31, 2012, related documents (or portions thereof) could have been withheld based on the FOIA exemption in section 11(s) of the FRA. Should such a case have occurred, the release of requested documents would likely have been delayed until the end of the relevant statutorily permitted deferral period, which could be as long as eight calendar quarters unless the Chairman determines that "earlier disclosure would have been in the public interest and would not have harmed the effectiveness of the relevant credit facility or the purpose or conduct of covered transactions." However, we determined that the FOIA exemption provided in section 11(s) of the FRA had not been used to withhold information in response to any FOIA requests.
The Board and the Reserve Banks maintain websites that provide a wide variety of information to the public regarding the administration of emergency credit facilities, discount window lending programs, and open market operations.10 This information includes statutorily mandated disclosures, such as the specific transaction-level information required by section 1109(c) of the Dodd-Frank Act and section 11(s) of the amended FRA, as well as reports resulting from independent oversight. The Board has also published information beyond that which is required by statute to further the transparency of its programs and operations. This information includes Board activities during the financial crisis, press releases, and information regarding the emergency credit facilities, discount window lending programs, and open market operations, such as aggregate amounts borrowed, interest rate information, and collateral requirements. As an example, each week the Board publishes statistical releases titled Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks on its website. The weekly release, also known as the H.4.1, includes total borrowing under the Board's lending programs for the nation as a whole, as well as the sum of borrowing under all programs for each Federal Reserve District.11 In addition, the Board's website is linked to, and supplemented by, the public websites of various Reserve Banks that assist the Board in its administration of these programs. Information from select websites is summarized below.
The Board publishes a significant amount of information about its administration of emergency credit facilities, discount window lending programs, and open market operations. Prior to the Dodd-Frank Act, the Board did not release transaction-level information, such as the names of specific borrowers, amounts borrowed, and other information now mandated for disclosure under section 1109(c) of the Dodd-Frank Act and section 11(s) of the FRA.
On December 1, 2010, the Board published on its website transaction-level information to address the one-time disclosure requirements Congress incorporated into section 1109(c) of the Dodd-Frank Act.12 This disclosure included loans and other financial assistance provided during the period beginning on December 1, 2007, and ending on July 21, 2010, the date of enactment of the Dodd-Frank Act. For this purpose, the Board established a webpage and posted
This information release was in a spreadsheet format that provided functionality to the public, including the capability to search and manipulate data.
On September 28, 2012, the Board released additional information to meet its ongoing disclosure requirement under section 11(s) of the FRA. In conformance with section 11(s) of the FRA, the information was disclosed on the last day of the eighth calendar quarter following the calendar quarter in which the covered transaction was conducted. This requirement was addressed by posting discount window lending program information in spreadsheet format to the Board's website, 13 and by posting open market operation information to the FRB-NY website. 14 For both discount window lending programs and open market operations, this information included
No emergency lending or credit facility transactions were included in this release because the last emergency credit facility was closed for new loans on March 31, 2010, and for new loan extensions on June 30, 2010.
In the event that the Board, with the approval of the Secretary of the Treasury, does authorize any loan or other financial assistance under section 13(3) of the FRA in the future, it must provide a detailed report 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 within seven days. This report, which must be updated every 30 days, is required to include
However, upon the written request of the Chairman of the Board, the information related to the identity of the participants in an emergency lending program or facility; the amounts borrowed by each participant in any such program or facility; and identifying details concerning the assets or collateral held by, under, or in connection with such a program or facility, shall be kept confidential and made available only to the chairpersons or ranking members of the committees described above.
The Board maintains a website devoted to independent audits of its activities as required by the Dodd-Frank Act.15 This website includes information on audits of the accounting, financial reporting, and internal controls of the Board and the Reserve Banks and provides links to reports issued by both the Board's OIG and the Government Accountability Office (GAO) regarding the emergency loan programs and other assistance authorized by the Board during the financial crisis. 16 This website also contains links to reports from the annual independent audits conducted on the Board's and the Reserve Banks' financial statements, as well as those of related limited liability companies. 17
Our office conducted an audit of the broad-based emergency credit facilities and issued a report detailing our findings in November 2010.18 This report included a description of each of the six emergency credit facilities, including their purpose, operation, and risks, as well as the combined usage of these facilities, outstanding loans, and their expiration dates. The report noted that the combined usage of the lending facilities peaked at $600 billion on November 5, 2008, and that as of June 30, 2010, the Board reported that none of the lending facilities had experienced any financial losses. The report also identified risks in the operation of these facilities, as well as actions taken to mitigate these risks. Further, the report stated that, overall, general indicators of market stress suggested that the lending facilities helped to stabilize financial markets and that each of the six lending facilities expired as market conditions improved. This report did not include any recommendations. As of October 31, 2012, outstanding loans extended under TALF totaled approximately $1.2 billion and were scheduled to mature no later than March 2015. All other loans have been repaid.
As required by section 1109 of the Dodd-Frank Act, GAO conducted a one-time audit of the emergency loan programs and other assistance authorized by the Board from December 1, 2007, through July 21, 2010. 19 For each of these programs or assistance, where relevant, GAO's objectives included a review of (1) the basis and purpose for its authorization, as well as accounting and financial reporting internal controls; (2) the use, selection, and payment of vendors; (3) management of conflicts of interest; (4) policies in place to secure loan repayment; and (5) the treatment of program participants.
In its related audit report, 20 GAO concluded that the financial crisis provided invaluable experience that the Federal Reserve can apply in the future should the use of these authorities again become warranted. GAO made recommendations to further strengthen policies for selecting vendors, ensuring the transparency and consistency of decisionmaking involving the implementation of any future emergency programs and managing risks related to these programs. The Board agreed that these recommendations would benefit its response to future crises, indicated that actions have been identified and taken to address a number of the recommendations, and stated that it would strongly consider how to best respond to those recommendations not already addressed.
Also linked to the Board's website, among other GAO reports, is Review of Federal Reserve System Financial Assistance to American International Group, Inc.21 This report details the results of GAO's audit of the Board's approval of entity-specific emergency lending to AIG. GAO reported that AIG assistance offered insights that could help guide future government action and improve ongoing oversight of systemically important financial institutions. GAO made no new recommendations in this report but reiterated previous recommendations aimed at improving the Federal Reserve's documentation standards and conflict-of-interest policies. In response, the Board noted a number of actions it had taken, such as creating a new division to focus on market pressures and developments that may create economic instability, working with the Financial Stability Oversight Council and other federal financial regulators to identify threats to financial stability, implementing changes to the supervision and regulation of the derivatives market, and developing a program of annual stress testing of large financial firms within the Board's purview. The Board also noted that FRB-NY had taken steps to manage situations that could give rise to actual or potential conflicts among firms that played an advisory or administrative role with FRB-NY related to AIG.
The financial statements of the Board, the Reserve Banks, and limited liability companies, which include the emergency credit facilities' accounts and activities and their related financial reporting internal controls, are audited annually by an independent auditing firm, and the results are linked to the website devoted to independent audits of Federal Reserve activities discussed above (see footnote 15). These independent financial statement audits, as well as other audits and reviews conducted by the Board OIG and the Reserve Banks' internal audit functions, did not report any significant accounting or financial reporting internal control issues concerning the emergency credit facilities.
As the Federal Reserve introduced new credit facilities and liquidity programs in response to the financial crisis, the Board and the Reserve Banks provided supporting information to the public. This information typically included
Additionally, as new programs became operational, they were generally added to the weekly H.4.1 release. In some cases, such as for introduction of the Commercial Paper Funding Facility, detailed accounting explanations were presented in cover notes to the H.4.1.
A key source of publicly available information is the Board's "Credit and Liquidity Programs and the Balance Sheet" webpage,22 which can be accessed via a link on the Board's homepage. The "Credit and Liquidity Programs and the Balance Sheet" webpage was initially published in early 2009 and is intended to increase understanding of the tools employed to address the financial crisis. This webpage consolidates sources of information, such as links to liquidity and credit facilities. It also provides other information, including an overview of the Federal Reserve's response to the financial crisis, 23 weekly statistical and balance sheet releases with related information, 24 Federal Reserve financial statements, 25 and links to other information and resources designed to enhance transparency.
The overview page of the "Credit and Liquidity Programs and the Balance Sheet" webpage also provides links to aggregate data, such as collateral and rate setting, but does not include the individual details by borrowing transaction that are protected at the transaction level by the FOIA exemption that is the focus of this report. 26 There is also a link to reports and disclosures that are required of the Board, 27 as well as links to webpages that provide aggregate lending data. As an example, each week the Board reports total borrowing under its lending programs for the nation as a whole, as well as the sum of borrowing under all programs for each Federal Reserve District. This information is published on the Board's website as H.4.1 releases. 28
As required under section 129 of the Emergency Economic Stabilization Act, 29 in the fall 2008 the Board began providing reports to Congress on the emergency credit facilities it established. These reports, which the Board makes available on its website, 30 include the rationale for each program, the amount of collateral pledged, and an assessment of the expected gain or loss to the public. In October 2009, the Board began to incorporate these reports into its monthly report on the "Credit and Liquidity Programs and the Balance Sheet." 31 These reports are still being submitted for the TALF, the last remaining emergency credit facility. Also linked to this webpage is a webpage titled "Other Lending Facilities," which provides additional background on these facilities that were designed to provide liquidity directly to borrowers and investors in key credit markets.32
The Board and the Reserve Banks maintain public webpages with information about the administration of discount window lending programs. This information includes the history and use of discount window lending programs as well as the statutory framework that governs them. As an example, the Federal Reserve publication, The Federal Reserve System Purposes and Functions, 33 is available via the Board's website. This publication provides a broad overview and history of discount window lending programs and open market operations, and it provides a summary of the laws and regulations that guide the administration of these operations. Also, aggregate information is available via the Board's "Credit and Liquidity Programs and the Balance Sheet" webpage, including discount window lending in table 1 of the H.4.1 statistical release and in "Loans" in tables 8 and 9 of that release.
In addition to the discount window lending information contained on the websites of the Board and the individual Reserve Banks, the Federal Reserve maintains a public website solely devoted to the discount window. 34 This website includes information regarding the administration of the programs offered, aggregate lending information, and real-time interest rates that would be charged to any institutions that access this lending on a given day. It explains that the FRA provides much of the statutory framework that governs discount window lending, and the programs and policies that implement this framework are set forth in Regulation A, Extensions of Credit by Federal Reserve Banks. 35 Furthermore, this website states that institutions that use the discount window must comply with the following publicly available Federal Reserve operating circulars:
The discount window website provides links to the FRA, 39 Regulation A, 40 and the circulars described above. In addition, the Federal Reserve maintains the Reserve Bank services website, 41 which provides access to all the circulars governing services provided to banks by the Federal Reserve. 42
The Board and FRB-NY maintain webpages with publicly available information concerning the administration of open market operations. 43 As with the discount window lending programs discussed above, The Federal Reserve System Purposes and Functions provides an overview and history of open market operations, and the Board provides links on the "Credit and Liquidity Programs and the Balance Sheet" webpage to other pages that provide aggregate data.
Each open market operation (transaction) affects the Federal Reserve's balance sheet; the size and nature of the effect depends on the specifics of the operation. In its weekly H.4.1 statistical release, the Federal Reserve's outright holdings of Treasury securities, agency securities, and agency mortgage-backed securities are reported in tables 1, 8, and 9. Table 2 of the H.4.1 also includes securities holdings by maturity distribution. Table 3 of the H.4.1 release provides more detail on mortgage-backed securities holdings, including the Federal Reserve's commitments to purchase and sell these securities, along with information related to cash and cash equivalents associated with the mortgage-backed securities purchase program.
The open market operations section of the FRB-NY website explains what open market operations are, what their purpose is, and how they are carried out. 44 Additional details on open market operations, including the names of the primary dealers, 45 information on auctions, CUSIPs,46 operation announcements and results, statements and operating policies, 47 and portfolio holdings data, 48 are also available on this website. FRB-NY reports each week's purchases and sales of mortgage-backed securities on its website, while purchases and sales of Treasury securities and agency debt are reported in its standard reporting of permanent open market operations. 49 FRB-NY also publishes a detailed explanation of open market operations in its annual Domestic Open Market Operations Reports. 50
Specific monetary policy decisions of the FOMC and directives to FRB-NY to conduct open market operations are available in the FOMC's policy statements and minutes on the FOMC webpage of the Board's public website. 51 In addition, this webpage also includes links to Beige Books, officially titled Summary of Commentary on Current Economic Conditions by Federal Reserve District, 52 which summarize anecdotal information on current economic conditions of the 12 Federal Reserve Districts. Via the "Transcripts and Other Historical Materials" link, 53 the public can search by year and, on a five-year delay, gain access to Green Books, officially titled Current Economic and Financial Conditions, which provide in-depth analysis of the U.S. and international economy; and Blue Books, officially titled Monetary Policy Alternatives, which provide background and context on monetary policy alternatives for FOMC consideration. The FOMC webpage also includes policy statements and other documents relevant to the Board's administration of open market operations.
Section 11(s) of the FRA provides for a delay of information disclosure to allow emergency credit facilities, discount window lending programs, and open market operations to function effectively. Federal Reserve officials expressed concerns that the existing release of detailed, transaction-level information, as well as any potential earlier releases, would have adverse effects on institutions that access these facilities and on the broader financial markets, as well as on the effectiveness of these emergency credit facilities and lending programs as tools to effect monetary policy decisions and respond to financial crises. Documented cases of the negative effects of real-time information disclosure are limited because central banks generally release only aggregate information. However, the limited instances and studies we reviewed offered support for the concerns expressed to us by Federal Reserve officials.
Board and Reserve Bank officials expressed concern that the public may interpret an institution's utilization of the Board's lending programs as an indication of an undisclosed financial problem. Reserve Bank officials stated that the public could perceive that institutions accessing discount window primary credit are financially weak, when in fact the current primary credit program is based on the premise that the institutions are financially sound. In 2008, the Chairman stated that
the efficacy of the discount window has been limited by the reluctance of depository institutions to use the window as a source of funding. The "stigma" associated with the discount window, which if anything intensifies during periods of crisis, arises primarily from banks' concerns that market participants will draw adverse inferences about their financial condition if their borrowing from the Federal Reserve were to become known.
Board officials echoed this sentiment when stating that the stigma associated with discount window borrowing can place an institution in a weakened condition by causing a loss of public confidence, a sudden outflow of deposits (a "run"), a loss of confidence by market analysts, a drop in the institution's stock price, and a withdrawal of market sources of liquidity. Further, officials stated that the removal of the FOIA exemption might cause institutions to wait until they were under enormous pressure before coming to the Federal Reserve for discount window credit. Reserve Bank officials informed us that they thought the future effectiveness of both discount window lending and emergency credit facilities during a crisis is already limited due to the existing releases of participant information.
Regarding open market operations, Board officials thought that the willingness of dealers to participate would decrease if the transaction-level information was released earlier, which would make the Board's operations much more expensive. Reserve Bank officials stated that the impact of the current delayed disclosure mandated by section 11(s) of the FRA is not clear. They stated that dealers' activities in open market operations are generally thought of as market positions. After primary dealers exit their positions, they are probably not concerned about revealing the transaction information, in that aspects of these positions may have already been factored in by the market. However, officials also stated that there might be a premium placed on transactions if trading participants were named in a transaction-level disclosure on a real-time basis, and that even a small premium could result in a large monetary impact given the trading volume of open market operations. Officials noted that one indication of a minimal impact from the current delayed release of detailed transaction-level information is that primary dealers continue to do business with the Federal Reserve.
Federal Reserve officials stated that the removal of the FOIA exemption would undermine the ability of the Board to conduct its business and limit the effectiveness of policy tools such as the discount window. Officials noted that the discount window has a dual role: It is used to help implement monetary policy, and it is used to provide liquidity during periods of crisis. They stated that institutions are concerned with a negative perception around accessing the discount window and that the removal of the FOIA exemption in section 11(s) of the FRA might cause banks to wait too long, until they were under enormous pressure, before coming to the Federal Reserve, which would not alleviate pressures in the markets.
Further, officials stated that they believed that even the statutorily deferred disclosures may negatively impact the future effectiveness of emergency credit facilities, discount window lending programs, and open market operations to respond to financial crises and effect monetary policy decisions. Officials noted that some financial institutions had already expressed that they would not be willing to borrow from the Federal Reserve, limiting the effectiveness of these facilities and programs. Relative to open market operations, officials stated that primary dealers know that with a real-time release of information, competitors will know if primary dealers take a big position, and that is not viewed positively by the primary dealers. Officials stated that the willingness of dealers to participate could decrease, which would make the Federal Reserve's operations much more expensive.
The Board and the central banks of other countries typically restrict transaction-level information about lending activity to avoid branding healthy banks with temporarily insufficient liquidity as financially weak. In the recent financial crisis, retail runs were rare because of deposit insurance and other changes in our financial system. Thus, we found few modern cases of real-time information disclosure triggering runs on banks. Similarly, we found that related studies on the impact of disclosure were limited. However, the few instances and studies we reviewed offered support for the concerns expressed to us by officials of the Board, the FOMC, and the Reserve Banks.
During the 19th and early 20th centuries, financial panics stressed the U.S. economy, leading to bank failures and business bankruptcies that severely disrupted the economy and led to the eventual creation of the Federal Reserve in 1913. In addition, the Banking Act of 1933 created the Federal Deposit Insurance Corporation to maintain stability and public confidence in the nation's financial system by insuring deposits, examining and supervising financial institutions for safety and soundness and consumer protection, and managing receiverships. Nonetheless, bank runs in many countries, including the United States, were common during the Great Depression, and the failure of the nation's banking system to effectively provide funding to troubled depository institutions contributed significantly to the economy's vulnerability to financial panics.
Cases in recent history that illustrate the potential impact of real-time disclosure of financial information on institutions include the following:
We also identified studies that supported the concept of a stigma associated with discount window borrowing and its associated impact on depository institutions that access discount window borrowing. These studies included discussions regarding how a stigma was evidenced during the recent financial crisis by banks willing to pay a higher premium to borrow from the TAF rather than borrow from the discount window. 55 One study found that a discount window stigma is economically relevant because it increased banks' borrowing costs to obtain liquidity during the crisis.
In terms of the broader financial market, another study noted that during severe financial crises, many asset prices plummet, impairing their liquidity provision function at the worst possible time and resulting in fire sales of assets. This study noted that these fire sales are at the core of the amplification mechanism observed in severe financial crises-large amounts of distressed asset sales depress asset prices, which exacerbate financial distress, which leads to further asset sales, and the downward spiral goes on.
We did not find evidence that the FOIA exemption included in section 11(s) of the amended FRA has impacted the public's ability to access information about the Board's administration of emergency credit facilities, discount window lending programs, or open market operations. This exemption works in tandem with the permitted deferral period for information disclosure to ensure the effectiveness of the emergency credit facilities, discount window lending programs, and open market operations as intended by the Dodd-Frank Act. We determined that neither the Board nor the FOMC has utilized the FOIA exemption in section 11(s) of the FRA from the enactment of the Dodd-Frank Act through October 31, 2012. We also found that a significant amount of information is available to the public concerning the Board's administration of these facilities, programs, and operations. Further, we noted that there are potential adverse effects of the earlier release of transaction-level information. For these reasons, we are not recommending any change to the FOIA exemption that Congress provided by amending section 11(s) of the FRA.
