Announcements.

FEDERAL OPEN MARKET COMMITTEE DIRECTIVE

The Federal Open Market Committee decided on May 7, 2002, to keep its target for the federal funds rate unchanged at 1 3/4 percent.

The information that has become available since the last meeting of the Committee confirms that economic activity has been receiving considerable upward impetus from a marked swing in inventory investment. Nonetheless, the degree of the strengthening in final demand over coming quarters, an essential element in sustained economic expansion, is still uncertain.

In these circumstances, although the stance of monetary policy is currently accommodative, the Committee believes that, for the foreseeable future, against the background of its long run goals of price stability and sustainable economic growth and of the information currently available, the risks are balanced with respect to the prospects for both goals.

Voting for the FOMC monetary policy action were Alan Greenspan, Chairman; William J. McDonough, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Edward M. Gramlich; Jerry L. Jordan; Robert D. McTeer, Jr.; Mark W. Olson; Anthony M. Santomero; and Gary H. Stern. Voting against the action: none.

LETTER FROM CHAIRMAN GREENSPAN ON FEDERAL TRADE COMMISSION ACT AND UNFAIR BANKING PRACTICES

The Federal Reserve Board released on May 30, 2002, a letter from Chairman Alan Greenspan to Representative John J. LaFalce confirming the application to banks of the prohibition contained in section 5 of the Federal Trade Commission Act against unfair or deceptive acts or practices.

The letter also confirms that the federal banking agencies are legally authorized to use enforcement powers under section 8 of the Federal Deposit Insurance Act against violations of this prohibition.

PROPOSAL TO REVISE DISCOUNT WINDOW PROGRAM

The Board of Governors requested on May 17, 2002, public comment on a proposal to revise the Federal Reserve's discount window programs, which provide credit to help depository institutions meet temporary liquidity needs.

Adoption of the proposal would not entail a change in the stance of monetary policy. The Federal Open Market Committee's target for the federal funds rate would not change as a result of this proposal, and the level of market rates more generally would be unaffected.

The Board is proposing the establishment of a new type of discount window credit, to be called primary credit. It would replace adjustment credit, which currently is extended at a below-market rate.

Primary credit would be available for very short terms as a backup source of liquidity to depository institutions that are in generally sound financial condition. It would be extended at a rate that would be above the usual level of short-term market interest rates, including the federal funds rate.

The primary credit program would be broadly similar to mechanisms used by many other major central banks.

The interest rate for primary credit would be set through a procedure identical to that currently used for the basic discount rate. Under the proposal, the interest rate on primary credit would initially be set at 100 basis points above the target federal funds rate. Thereafter, Reserve Banks would set the rate, subject to review and determination by the Board of Governors.

By restricting eligibility to generally sound institutions and by eliminating the incentive for institutions to borrow to exploit the positive spread of money market rates over the discount rate, the primary credit program should considerably reduce the need for the Federal Reserve to review the funding situations of borrowers.

The Federal Reserve expects that, as a result of this reduced administration, institutions' willingness to use the window when money markets tighten should increase, limiting potential volatility in the federal funds rate.

Another element of the proposal is the establishment of a secondary credit program to replace the existing extended credit program. Secondary credit would be available in appropriate circumstances to depository institutions that do not qualify for primary credit. Secondary credit would be extended at an interest rate 50 basis points above the primary discount rate.

The proposal also contains certain minor technical changes to the Board's Regulation A that are independent of the primary and secondary credit proposals.

Comments are due ninety days after publication in the Federal Register.

ADVISORY ON FRAUD SCHEMES INVOLVING FINANCIAL INSTRUMENTS

The Federal Reserve Board on May 20, 2002, alerted financial institutions and the public to the continued proliferation of fraudulent schemes involving financial instruments.

In 1993 and again in 1996, the Federal Reserve issued advisories concerning illegal activities claiming to involve a financial instrument issued by a "prime bank." These questionable transactions promise extremely high rates of return with little or no risk and often insinuate the involvement of a well-known government agency, such as the Federal Reserve, the World Bank, or the International Monetary Fund.

The Federal Reserve knows of no legitimate use of "prime bank" financial instruments and does not license anyone to trade any type of financial instruments or to act as the Federal Reserve's agent to sell or redeem them.

In an advisory letter to supervisory authorities at the twelve regional Federal Reserve Banks and to banking organizations supervised by the Federal Reserve, the Board again stressed the dangers associated with investing or participating in these illicit transactions and listed several hallmarks or "red flags" that have been associated with many fraudulent scams.

The Federal Reserve also noted that, since the issuance of the Board's 1993 and 1996 alerts concerning "prime bank" financial instruments, many wrongdoers have stopped referring to "prime bank" instruments and begun to use the names of legitimate financial instruments in their scams, such as "medium term notes" (often referred to as "MTNs").

Federal and state law enforcement agencies, as well as the Securities and Exchange Commission (SEC), have investigated and prosecuted numerous individuals associated with "prime bank" or other investment schemes involving financial instruments.

Individuals, banking organizations, and other entities that have been invited to participate in transactions with the characteristics described in the new alert are encouraged to contact the local offices of federal law enforcement authorities as well as the SEC.

WHITE PAPER ON SETTLEMENT OF GOVERNMENT SECURITIES

The Federal Reserve Board and Securities and Exchange Commission announced on May 9, 2002, the release of a "white paper" discussing possible structural changes in the settlement of government securities and requested public comment on the document.

The paper, published May 13 in the Federal Register, was developed with a goal of identifying issues and questions that need to be further explored. In releasing the paper, the staffs of the agencies emphasized they have not concluded that any of the approaches discussed represent an improvement over current arrangements or that structural change is necessary.

Following the September 11, 2001, terrorist attacks, the agencies held discussions with market participants concerning vulnerabilities in the settlement of government securities. Market participants were interested in exploring structural changes in the provision of settlement services for government securities, including the concept of establishing a utility to conduct settlement. The paper identifies possible approaches for creating a utility and possible assessment criteria for evaluating the various approaches.

MINUTES OF BOARD DISCOUNT RATE MEETINGS

The Federal Reserve Board released on May 20, 2002, the minutes of its discount rate meetings from February 4, 2002, to March 18, 2002.

ANTHRAX TESTS AT THE BOARD

On May 9, 2002, mail processed in a secure facility outside the Federal Reserve Board buildings tested positive for traces of anthrax DNA.

Routine preliminary tests, administered late Tuesday and Wednesday by Board and contract employees wearing protective environmental suits, detected anthrax spores in small batches of mail totaling about twenty pieces. The affected mail was routine commercial and business mail and did not have any of the characteristics identified by the FBI as suspicious.

The swabs that produced the positive readings will be sent to a laboratory for additional testing.

The source of the possible contamination is not known. Subsequent tests of mailroom surfaces and mail-distribution points within the Board's buildings have all been negative.

Board officials have notified, and are working with, the FBI and with U.S. Postal Service inspectors.

An anthrax trace found at the Board last December is believed to have been the result of cross-contamination. Extensive follow-up testing after that incident yielded no further positive results.

PUBLICATION OF THE MAY 2002 UPDATE TO THE COMMERCIAL BANK EXAMINATION MANUAL

The May 2002 update to the Commercial Bank Examination Manual, Supplement No. 16, has been published and is now available. The Manual comprises the Federal Reserve System's regulatory, supervisory, and examination guidance for state member banks. The new supplement includes the following:

1. Board's October 16, 2001, Approval of a Revision to Regulation K. The Board authorized, effective November 26, 2001, limited portfolio investments in foreign companies without prior Board notice (sections 211.8 and 211.9) and limited investments in Edge and agreement corporations (section 211.5) that may be permissible for state member banks and other foreign banking or other bank-related organizations. (See Supervision and Regulation [SR] Letter 02-3.)

2. Revisions to the Capitol Adequacy Standard (Risk-Based Measure).

a. The November 8, 2001, Regulation H change (effective January 1, 2002) addressed the treatment of recourse obligations, residual interests, and direct-credit substitutes that expose banking organizations primarily to credit risk. New standards are added for the treatment of residual interests, including a concentration limit for credit-enhancing interest-only strips. Credit ratings from rating agencies and certain limited alternative credit-rating approaches can be used by banks to match the risk-based capital requirement more closely to their relative risk of loss for certain positions in asset securitizations. (See SR Letters 02-16, 02-15, 02-14, and 02-12.)

b. The January 8, 2002, Regulation H change (effective April 1, 2002) established special minimum capital requirements for equity investments in nonfinancial companies. The new capital requirements apply symmetrically to equity investments. The requirements impose a series of marginal capital charges on such authorized covered equity investments that increase with the level of a bank's overall exposure to equity investments relative to its tier 1 capital. (See SR Letter 02-4.)

c. The risk-based capital treatment for forward equity transactions also is discussed. The Federal Reserve has determined that any common stock that is covered by forward equity transactions entered into after the issuance of SR Letter 01-27 (November 9, 2001) will be excluded from a state member bank's tier 1 capital, other than those transactions specified for deferred compensation or other employee benefit plans.

3. Management of Insurable Risks. Certain types of insurance that are available to the banking industry are discussed. Bank management responsibilities for managing insurable risks are also discussed, including coordinating the management of the bank's various types of risk exposures in conjunction with an insurance program or making a decision to selectively self-insure (alternative risk transfer) when permissible and appropriate. The examiners' responsibilities for reviewing a bank's risk management and management of its insurance program are also discussed. The examination objectives, examination procedures, and internal control questionnaire are updated.

4. Payment Systems Risk and Electronic Funds Transfer. The update discusses the Board's December 11, 2001, revision of the policy statement on payments system risk (PSR policy). The PSR policy was revised to modify the net debit cap calculation for U.S. branches and agencies of foreign banks, as well as the time that electronic check presentments are posted to depository institutions' Federal Reserve accounts for purposes of measuring daylight overdrafts. The PSR policy incorporates, with minor modifications, the Board's interim policy that allows certain depository institutions to pledge collateral to the Federal Reserve to access additional daylight-overdraft capacity above their net debit caps. The examiners' responsibilities are discussed with regard to payment system risk and electronic funds transfer. The examination objectives, examination procedures, and internal control questionnaire also have been updated.

5. Examiners' Review of Regulatory Reports. Changes in Federal Reserve reporting requirements are discussed for reports that are filed by banks and other banking organizations. The changes include the new FR Y-10 report, the revised FR Y-6 report, and the internal record-keeping requirements for FR 2064. (See SR Letter 02-2 and its discussion of examiners' responsibilities in this regard.)

6. Various Other Regulation H Revisions.

a. The sections on the overall conclusions regarding the condition of the bank and on other types of examinations have been revised to include the Federal Reserve's notification requirements, whereby a state member bank is to notify the Federal Reserve System regarding changes in the general character of a bank's business or the scope of its corporate powers. (See sections 208.3(d)(1) and (2) and SR Letter 02-9). Included is a discussion on individual or multiple-branch applications, expedited processing criteria, and a bank's investment in premises for branches. Branch closing requirements are discussed in relationship to section 42 of the Federal Deposit Insurance Act, section 208.6 of Regulation H, and the June 29, 1999, joint policy statement regarding branch closings. Customers and the Federal Reserve must be notified of branch closings.

b. The bank premises and equipment section has been revised to reflect previous changes to section 24 of the Federal Reserve Act and section 208.21(a) of Regulation H. For example, a state member bank that is well rated and well capitalized may invest in bank premises in an amount of 150 percent or less of its perpetual preferred stock and related surplus plus common stock plus surplus, if the bank gives at least a fifteen-day prior notice to the Reserve Bank.

c. The definition of "capital stock and surplus" is discussed as it pertains to the Board's authority to approve a state member bank's limited investment of up to 10 percent of its capital and surplus in a community development corporation. (See Regulation H, section 208.2(d).) The investment limitations also are discussed for section 9 of the Federal Reserve Act for public welfare or other such investments.

A more detailed summary of changes is included with the update package. The Manual and updates, including pricing information, are available from Publications Services, Mail Stop 127, Board of Governors of the Federal Reserve System, Washington, DC 20551 (or charge by facsimile: 202-728-5886). The Manual is also available on the Board's public web site: www.federalreserve.gov/boarddocs/ supmanual/.

ENFORCEMENT ACTIONS

The Federal Reserve Board announced on May 16, 2002, the issuance of an order of prohibition against Edward DeRosa, a former employee and institution-affiliated party of Rabobank Nederland, New York, New York.

Mr. DeRosa, without admitting to any allegations, consented to the issuance of the order based on his violations of law, unsafe and unsound practices, and breaches of his fiduciary duty to Rabobank and its customers in connection with his embezzlement of approximately $170,000 for his personal use.

The Federal Reserve Board, the Maryland Commissioner of Financial Regulation, and the Central Bank of Ireland jointly announced on May 16, 2002, the execution of a written agreement by and among Allied Irish Banks, p.l.c., Dublin, Ireland, Allfirst Financial Inc., Baltimore, Maryland, and Allfirst Bank, Baltimore, Maryland.

The Federal Reserve Board announced on May 10, 2002, the issuance of a cease and desist order against Pedro Cabrera, a former employee of Banco Mercantil, C.A., S.A.C.A., New York Agency, New York, New York.

The Federal Reserve Board announced on May 10, 2002, the issuance of a cease and desist order against the Bank of the Orient, San Francisco, California.

BOARD STAFF CHANGE

The Federal Reserve Board announced on June 4, 2002, that Richard (Dick) Stevens, Director of the Division of Information Technology, will retire on June 28 after more than twenty-nine years at the Board.