§347b Advances to Individual Member Banks on Time or Demand Notes; Maturities; Time Notes Secured by Mortgage Loans Covering One-to-four Family Residences

Summary

Federal Reserve banks can lend money to member banks by taking short-term notes (time or demand notes) that mature in not more than four months, as long as the loan is properly secured. They can also lend on time notes for longer periods if those notes are covered by mortgages on one-to-four family homes, with interest set at the lowest discount rate that bank is charging on the date of the note. If a bank is undercapitalized, those loans generally cannot be outstanding for more than 60 days in any 120-day span. That limit is paused for 60 days if the head of the appropriate federal banking agency or the Federal Reserve Board chair (after an exam) certifies in writing that the bank is viable; that 60-day pause can be extended in 60-day steps with new written certifications, and the agency head cannot delegate the power to sign the certificate. If the Board treats a bank as critically undercapitalized, special rules let loans continue but create potential financial responsibility for the Board: if loans stay unpaid or new loans are made after the five-day period following the bank becoming critically undercapitalized, and the FDIC suffers a larger loss than it would have if the bank had been liquidated at that five-day mark, the Board must pay the FDIC the excess loss, capped at the smaller of (a) the loss the Board or any Reserve bank would have had on those increased loans if they were unsecured, or (b) the interest earned on those increased loans. The Board must pay the FDIC and report to Congress about any such liability within six months. A Federal Reserve bank is never required to make, increase, renew, or extend any advance. Definitions (short): "Appropriate Federal banking agency" and "depository institution" refer to other federal law; "critically undercapitalized" and "undercapitalized" follow statutory definitions (including a CAMEL rating of 5); "viable" means the regulators find the bank is not critically undercapitalized, is not likely to become so, and is not expected to be placed in conservatorship or receivership.