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Fed Implements Two New Lending Programs

Tuesday, April 1, 2003

The Federal Reserve has replaced adjustment credit and extended credit with two new programs: primary credit and secondary credit. The same types of depository institutions that previously qualified for adjustment or extended credit—such as commercial banks, savings and loans and credit unions—will now qualify for primary or secondary credit.

The restructuring of the Federal Reserve's credit programs is designed to improve the functioning of the discount window. It does not represent a change in either the stance of monetary policy or the process by which the discount rate is set.

Primary credit will be available to financial institutions that Reserve Banks deem to be in generally sound financial condition. Normally, primary credit will be granted on a "no questions asked" basis at an initial rate of 100 basis points above the Federal Open Market Committee's target for the federal funds rate.

Generally, primary credit will be extended on a very short-term basis—typically overnight—but small institutions that cannot obtain temporary funds in the market at reasonable terms may extend their credit for up to a few weeks, as long as they are in sound financial condition.

Secondary credit is for institutions that do not qualify for primary credit, and it will entail increased administration. The rate is 50 basis points above the primary credit rate.

For more information about both programs, please see the Credit office's web site, or contact an analyst in the Credit office, 1-866-666-8316, then press 1.