The Financial Times reports, citing the New York Fed, that more than half the collateral backing cash advances by the Federal Reserve is in the form of loans rather than bonds and other securities. The New York Fed claims that since the credit crisis began banks have provided various types of collateral, including Treasuries, Federal agency bonds and other mortgage backed securities. However, the high proportion of loans being used as collateral indicates that smaller banks, who have fewer securities to post with the central bank, are using the Fed's liquidity support facilities more frequently.

Since the inter-bank lending crisis blew up last August the Fed has been willing to take on more illiquid assets as collateral, reported FT. However, the central bank defends itself against criticism of greater risk-taking by asserting it is exposed only to credit risk and not liquidity risk; that it pools all the collateral from a given institution; and that the Fed's outstanding loans are heavily over collateralized anyway.

 

 

 

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