The Fed - Discount Window Lending (2024)

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Discount Window Lending

Background

Federal Reserve lending to depository institutions (the "discount window") plays an important role in supporting the liquidity and stability of the banking system and the effective implementation of monetary policy. By providing ready access to funding, the discount window helps depository institutions manage their liquidity risks efficiently and avoid actions that have negative consequences for their customers, such as withdrawing credit during times of market stress. Thus, the discount window supports the smooth flow of credit to households and businesses. Providing liquidity in this way is one of the original purposes of the Federal Reserve System and other central banks around the world.

Much of the statutory framework that governs lending to depository institutions is contained in section 10B of the Federal Reserve Act. The general policies that govern discount window lending are set forth in the Federal Reserve's Regulation A. As described in more detail below, depository institutions have access to three types of discount window credit from their regional Federal Reserve Bank: primary credit, secondary credit, and seasonal credit, each with its own interest rate ("discount rate"). Rates are established by each Reserve Bank's board of directors, subject to the review and determination of the Board of Governors of the Federal Reserve System. The rates for the three lending programs are the same across all Reserve Banks. All discount window loans must be collateralized to the satisfaction of the lending Reserve Bank.

Further information on the discount window, including interest rates, is available from the Federal Reserve System's discount window website.

Primary credit is a lending program that serves as the principal safety valve for ensuring adequate liquidity in the banking system. It is available to depository institutions that are in generally sound financial condition, and there are no restrictions on the use of funds borrowed under primary credit. Primary credit is priced relative to the Federal Open Market Committee's (FOMC) target range for the federal funds rate.

On March 15, 2020, the Federal Reserve announced changes to primary credit. These changes included the following:

• Narrowing the spread of the primary credit rate relative to the general level of overnight interest rates to help encourage more active use of the window by depository institutions to meet unexpected funding needs.
• Providing discount window credit for periods as long as 90 days, prepayable and renewable by the borrower on a daily basis.

These changes were effective March 16, 2020, and will remain in effect until the Board announces otherwise.

Secondary credit is a lending program that is available to depository institutions that are not eligible for primary credit. It is extended on a very short-term basis, typically overnight, at a higher rate than the primary credit rate. In contrast to primary credit, there are restrictions on the uses of secondary credit extensions. Secondary credit is available to meet backup liquidity needs when its use is consistent with a timely return by the borrower to a reliance on market sources of funding or the orderly resolution of a troubled institution. Secondary credit may not be used to fund an expansion of the borrower's assets. Moreover, the secondary credit program entails a higher level of Reserve Bank administration and oversight than the primary credit program. Reserve Banks typically apply higher haircuts on collateral pledged to secure secondary credit.

Seasonal credit is a lending program that is available to assist small depository institutions with demonstrated liquidity pressures of a seasonal nature and will not normally be available to institutions with deposits of $500 million or more. Institutions that experience and can demonstrate a clear pattern of recurring intra-yearly fluctuations in deposits and loans – caused by construction, college, farming, resort, municipal financing and other seasonal types of business – frequently qualify for the seasonal credit program. Eligible depository institutions may qualify for term funding for up to nine months of seasonal need during the calendar year, enabling them to carry fewer liquid assets during the rest of the year and, thus, allowing them to make more funds available for local lending. The interest rate applied to seasonal credit is a floating rate based on market rates.

Data

The initial reporting period covers loans made between July 22, 2010 and September 30, 2010. Loan data for subsequent periods will be published quarterly, with an approximately two-year lag.

The following information on discount window loans is provided for the fourth quarter of 2017 (see individual Excel files for earlier definitions):

1. For information on collateral margins, refer to the Discount Window and Payment System Risk public website, https://www.frbdiscountwindow.org Return to text