Discount Window Lending Programs: What’s New?
Applying for discount window credit just got easier for banks. The Federal Reserve System recently modified its discount window lending programs in an effort to simplify the borrowing process, improve the implementation of monetary policy and promote consistency in the lending function. The new rules amending Regulation A became effective on Jan. 9, 2003, and replaced adjustment credit and extended credit programs with primary and secondary credit programs.
The Federal Reserve System recently modified its discount window lending programs in an effort to simplify the borrowing process, improve the implementation of monetary policy and promote consistency in the lending function.
The new primary credit program replaced adjustment credit as the principal safety valve for ensuring adequate liquidity in the banking system and as a back-up source of short-term funds for sound depository institutions. Primary credit is generally extended for short periods, typically overnight, on a “no-questions-asked” basis. The primary credit rate initially has been set 100 basis points above the Federal Open Market Committee’s target for the federal funds rate.
Eligibility is based largely on an institution’s supervisory exam rating and capital status; supplementary information, when available may also be used. In general, institutions with composite CAMELS (capital, asset quality, management, earnings, liquidity and sensitivity to market risk) ratings of 1, 2 or 3 that are at least adequately capitalized will be eligible for primary credit.
Secondary and seasonal credit
Secondary credit is intended for institutions that do not qualify for primary credit. Secondary credit will be extended to institutions primarily to help them return quickly to a reliance on market funding sources. This program entails a higher level of administration and oversight than primary credit. Secondary credit will be extended at a rate 50 basis points above the primary credit rate. Collateral requirements and the seasonal credit program remain unchanged.
In the event of a significant disruption to U.S. money markets, the Board of Governors, in consultation with the Reserve Banks, may lower the primary credit rate to the target federal funds rate, with a view to preventing tightening in money markets and to mitigating the impact of disruptions.
More detailed information on the new primary and secondary credit programs is available at the Federal Reserve System’s discount window Web site.
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