- Why did the Federal Reserve change the discount window at the beginning of 2003? What are the major objectives of the primary and secondary credit discount window facilities?
The restructuring of the discount window at the beginning of 2003, including repositioning the discount rate from below the FOMC's target rate to above the target rate, was designed to improve the window's operation as a mechanism for implementing monetary policy and as a backup source of funds for individual depository institutions.
The primary credit program aids the implementation of monetary policy by: (1) making funds readily available at the primary credit rate when there is a temporary shortage of liquidity in the banking system, thus keeping the actual federal funds rate from rising much above the primary credit rate, (2) making the process of borrowing from the discount window administratively easier, and (3) promoting consistency in the lending function across the Federal Reserve System. By minimizing the administration of and restrictions on the use of discount window credit, and by limiting extensions of credit to generally sound depository institutions, the primary credit program reduces depository institutions' reluctance to borrow, thus making the discount window a more effective policy instrument. The secondary credit program makes credit available, when appropriate, to meet backup liquidity needs of depository institutions that do not qualify for primary credit.
- What are the key features of primary credit and secondary credit?
|
Feature
|
Primary Credit
|
Secondary Credit
|
|
Rate
|
Above the FOMC's target for the federal funds rate (except during a financial emergency, when the primary credit rate may be lowered to the FOMC's target for the federal funds rate). |
Primary credit rate plus 50 basis points*. |
|
Term
|
Overnight |
Short-term, usually overnight. Can be extended for a longer term if such credit would facilitate a timely return to reliance on market funding or an orderly resolution of a failing institution, subject to statutory requirements (FDICIA restrictions). |
|
Eligibility
|
Depository institutions in generally sound financial condition; essentially the same as eligibility for daylight credit. |
Depository institutions that do not qualify for primary credit. |
|
Use
|
No restrictions. May be used to fund sales of federal funds. |
As a backup source of funding on a very short-term basis, or to facilitate an orderly resolution of serious financial difficulties. |
|
Administration
|
Ordinarily no questions asked. |
Reserve Banks will collect information necessary to confirm that borrowing is consistent with the objectives of the program. |
- How do Reserve Banks administer the primary and secondary credit discount window programs?
Primary credit is extended to generally sound depository institutions at a rate above the FOMC's target rate with minimal administrative burden on the borrower. Unless the nature of the borrowing request strongly suggests that the credit extension is not for short-term funds or does not appear consistent with the backup nature of the facility, depository institutions seeking primary credit will be asked only for the minimum information necessary to process the loan; normally they will not be asked why they are borrowing. Depository institutions are not required to seek funds elsewhere before requesting a discount window loan.
Unlike primary credit, the secondary credit program is not a "minimal administration" facility. Reserve Banks will obtain sufficient information about a borrower's financial situation and reasons for borrowing to ensure that an extension of credit complies with the conditions of the program.
- Is a depository institution that is eligible for primary credit allowed to use the Federal Reserve as a regular source of funds?
The Federal Reserve expects that, given the pricing of primary credit, institutions will not rely on the discount window as a regular source of funding. Though institutions are not required to seek funding elsewhere before requesting primary credit, primary credit is intended to be used mainly on a very short-term basis, usually overnight, as a backup source of funding. Primary credit is available for a period of up to approximately one month to generally sound depository institutions that cannot obtain funding in the market on reasonable terms. Ordinarily, this will be relevant only for very small institutions.
- Are there any restrictions on the use of funds a depository institution borrows from the Federal Reserve under the primary credit program? Under the secondary credit program?
There are no restrictions on the use of primary credit. In particular, borrowers are not prohibited from using primary credit to finance sales of federal funds.
Secondary credit is available to meet backup liquidity needs when its use is consistent with a timely return 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.
- How do Reserve Banks determine which financial institutions are eligible for primary credit? For secondary credit? How often is eligibility reassessed? When are institutions notified about their eligibility?
Eligibility for primary credit is limited to depository institutions that are in generally sound financial condition. Reserve Banks determine eligibility on an ongoing basis using supervisory ratings and capitalization data; supplementary information, when available, may also be used. Essentially the same criteria that are used to determine eligibility for daylight credit are used to determine eligibility for primary credit. Institutions that do not qualify for primary credit are eligible for secondary credit. Institutions' eligibility is reassessed as new information about their condition becomes available.
- Depository institutions assigned a composite CAMELS or CAMEL rating of 1, 2, or 3 (or SOSA 1 or 2 and ROCA 1, 2, or 3) that are at least adequately capitalized are eligible for primary credit unless supplementary information indicates that the institution is not generally sound.
- Depository institutions assigned a composite CAMELS or CAMEL rating of 4 (or SOSA 1 or 2 and ROCA 4 or 5) are not eligible for primary credit unless an ongoing examination indicates that the institution is at least adequately capitalized and that its condition has improved sufficiently to be deemed generally sound.
- Depository institutions assigned a composite CAMELS or CAMEL rating of 5 (or SOSA 3, regardless of ROCA) or that are undercapitalized are not eligible for primary credit.
Institutions that had executed borrowing agreements before 2003 were notified of their eligibility for primary or secondary credit at the onset of those programs in January of 2003. Other institutions are notified of their eligibility for primary or secondary credit once they execute a borrowing agreement and submit the agreement to their Reserve Bank. Institutions that have executed and submitted a borrowing agreement will be notified promptly if their eligibility changes.
- How is the primary credit rate set?
The Federal Reserve Act requires Reserve Banks' boards of directors to establish the discount rate, subject to review and determination by the Board of Governors, at least every two weeks. Reserve Banks' boards of directors establish the level of the primary credit rate, not a spread relative to another rate. Though the spread between the primary credit rate and the FOMC's target for the federal funds rate has been 100 basis points, the spread could vary. Policymakers sought a rate spread that would give most depository institutions the incentive to obtain regular funding from market sources rather than from the discount window. Experience with the above-market-rate Y2K Special Liquidity Facility, information about the pricing of correspondent lines of credit, and information from other central banks that have above-market-rate lending facilities indicated that a spread of 100 basis points is appropriate to accomplish this goal.
Please note, the spread of the primary credit rate over the FOMC's target federal funds rate was initially 100 basis points. During the financial crisis, this spread was reduced to 50 basis points on August 17, 2007, and was further reduced, to 25 basis points, on March 16, 2008. Effective February 19, 2010, the spread of the primary credit rate over the FOMC's target federal funds rate was increased to 50 basis points. The Federal Reserve will assess over time whether further increases in the spread are appropriate.
- Does the Federal Reserve disclose the identity of institutions that borrow from the discount window?
Yes. In accordance with the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. No. 111-203), the Federal Reserve has changed its practices with respect to disclosure of discount window lending information. Effective for discount window loans (primary, secondary, and seasonal credit) extended on or after July 21, 2010, the Federal Reserve will publicly disclose the following information, generally about two years after a discount window loan is extended to a depository institution:
- The name and identifying details of the depository institution;
- The amount borrowed by the depository institution;
- The interest rate paid by the depository institution; and
- Information identifying the types and amounts of collateral pledged in connection with any discount window loan. This disclosure requirement does not apply to collateral pledged by depository institutions that do not borrow
This information will be released quarterly, and may be disclosed with less than a two-year lag if the Chairman of the Federal Reserve determines that it is in the public's interest, and that the disclosure would not harm the purpose or conduct of the discount window. The text of the Dodd-Frank Wall Street Reform and Consumer Protection Act can be found at
http://www.gpo.gov/fdsys/pkg/BILLS-111hr4173enr/pdf/BILLS-111hr4173enr.pdf
.
- Does the Federal Reserve publish information about which depository institutions are allowed to borrow from the discount window at the primary credit rate?
The Federal Reserve does not publish information regarding institutions' current eligibility for primary or secondary credit. However, as noted in item 8 above, the Federal Reserve will publicly disclose, with approximately a two-year lag, the interest rate paid on discount window loans. Therefore, a borrowing institution's past eligibility to borrow at the primary credit rate may be inferred.
- How do bank supervisors/examiners view an institution's use of primary credit?
The
Interagency Advisory on the Use of the Federal Reserve's Primary Credit Program in Effective Liquidity Management (July 23, 2003) encourages depository institutions to consider the discount window as part of their backup liquidity arrangements. As is true of any backup liquidity facility, being prepared to borrow primary credit enhances an institution's liquidity. The
Advisory states that “bank supervisors and examiners should view the occasional use of primary credit as appropriate and unexceptional.” Of course, excessive reliance on expensive funding, including heavy use of primary credit, may spark some questions by examiners.
- Does the Federal Reserve share the list of depository institutions eligible for primary and secondary credit with bank regulators? Does the Federal Reserve share information about institutions' use of the discount window with bank regulators?
As noted above, the
Interagency Advisory on the Use of the Federal Reserve's Primary Credit Program in Effective Liquidity Management (July 23, 2003) encourages depository institutions to consider the discount window as part of their backup liquidity arrangements. The Federal Reserve will provide each federal regulator, at its request, a list showing which of the depository institutions supervised by that regulator have filed borrowing agreements and pledged collateral and thus are prepared to use the primary or secondary credit facilities as a backup source of short-term funds. Also, as noted in item 8 above, the Federal Reserve will publicly disclose, with approximately a two-year lag, certain information on discount window loans extended on or after July 21, 2010.
Otherwise, the Federal Reserve does not routinely share information about institutions' borrowing with regulators. Regulators may, however, obtain information about an institution's borrowing history when they are investigating a potential supervisory problem.
- How does the Federal Reserve publish aggregate data on borrowings under the primary and secondary credit programs?
Each week,
the Board of Governors reports total borrowing under each lending program for the nation as a whole as well as the sum of borrowing under all programs for each Federal Reserve District.
- The Federal Reserve describes the primary credit program as a 'no questions asked' program with minimum administration. What does that mean?
Under the amended
Regulation A in place since the beginning of 2003, qualified depository institutions seeking overnight primary credit ordinarily are asked to provide only the minimum amount of information necessary to process the loan. In nearly all cases, this would be limited to the amount and term of the loan. Should an institution's pattern of borrowing or the nature of a particular borrowing request strongly indicate that the depository institution is not using primary credit as a backup source of short-term liquidity, or if the request raises questions regarding an institution's eligibility for primary credit, the Reserve Bank may seek additional information. Depository institutions are not required to seek funds elsewhere before requesting a discount window loan and will not be asked if they have sought funds elsewhere.
As has always been the case, a Federal Reserve Bank has no obligation to make, increase, renew, or extend any loan or advance to any institution.
- How many times may a depository institution borrow from the discount window in any given period?
No frequency guidelines exist and there is no expectation that any will be established. Reserve Banks evaluate frequency of borrowing in the context of primary credit being a backup source of short-term liquidity. Moreover, the Federal Reserve encourages depository institutions to borrow primary credit freely when federal funds trade at a rate above the primary credit rate.
- Is there any threshold for the size of a loan beyond which a Reserve Bank will ask the depository institution some questions regarding the loan?
No size limitations or thresholds exist. Reserve Banks use judgment to decide when, if at all, a loan request is large enough to warrant asking questions at the time of the request or after the fact.
- In what situations may a Reserve Bank extend primary credit for consecutive days? What is the maximum period that credit can be outstanding?
Primary credit may be extended for periods of up to approximately one month to small depository institutions in generally sound financial condition that cannot obtain temporary funds in the market at reasonable terms. Credit extensions outstanding for more than several consecutive days may be subject to increased administration. The borrower may be asked to explain why it needs longer-term credit. Reserve Banks may make multi-day secondary credit loans to enable a timely return to a reliance on market sources of funding or the orderly resolution of a troubled institution. The appropriate duration of multi-day loans will be at the discretion of the local Reserve Bank. Borrowing by depository institutions when the federal funds rate rises to or above the primary credit rate is not subject to any frequency considerations.
- What procedures should a depository institution follow to borrow from the discount window?
A depository institution should contact its Reserve Bank using the toll free number listed below:
|
Federal Reserve Bank-District
|
Toll-Free discount window number
|
|
Atlanta-6
|
888-500-7390
|
|
Boston-1
|
800-716-3773
|
|
Chicago-7
|
800-380-3762
|
|
Cleveland-4
|
888-719-4636
|
|
Dallas-11
|
877-682-3256
|
|
Kansas City-10
|
800-333-2987
|
|
Minneapolis-9
|
877-837-8815
|
|
New York-2
|
866-226-5619
|
|
Philadelphia-3
|
800-372-2011
|
|
Richmond-5
|
800-526-2036
|
|
San Francisco-12
|
866-974-7475
|
|
St. Louis-8
|
866-666-8316
|
Requests for loans must be made by authorized individuals per the borrowing resolution of the depository institution. Information about legal documentation required to borrow from the discount window is available on this website at
http://www.frbdiscountwindow.org/agreements.cfm or from the Reserve Banks. All discount window loans must be secured to the satisfaction of the Reserve Bank.
Institutions may request a loan at any time during the business day. Normally, loans are posted to borrowers' (or their correspondents') accounts at the close of Fedwire (see question 18). Please refer to
The Mechanics of Borrowing for additional information.
- When are the proceeds of discount window loans made available to the borrower? When is the subsequent repayment posted?
As noted in
Operating Circular No. 10 [PDF; 249K]
, loan proceeds normally are made available at the close of Fedwire (usually 6:30 pm ET ) on the day the advance is approved by the Reserve Bank. Reserve Banks may approve requests for earlier availability. Discount window credit is extended for 24 hours, or multiples thereof. The repayment will be booked at the same time of day that the funds were made available to the borrower.
- What is the purpose of the seasonal lending program? Where can I find more information about the seasonal lending program?
Under the seasonal lending program, small depository institutions with a recurring, seasonal need for funds may qualify to borrow from the discount window for up to nine months during the calendar year to meet seasonal borrowing needs of the communities they serve. Institutions with deposits of less than $500 million that experience fluctuations in deposits and loans caused by construction, college, farming, resort, municipal financing and other seasonal types of business frequently qualify for the seasonal lending program. More information about the seasonal lending program is available on the
Seasonal Lending Program page of this website.
- Did the introduction of the primary and secondary credit programs have any impact on the seasonal credit program?
The only change to the seasonal credit program is that the previous requirement that the seasonal credit rate be at or above the basic discount rate has been eliminated.
- If a depository institution is in the seasonal credit program, may it use seasonal credit rather than the primary credit facility for short-term needs?
Yes. If an institution qualifies for and is granted a seasonal line, the institution decides when to draw on the line.
