How To Use the Fed's Discount Window: Traditional and New, Temporary Lending Programs Fit Specific Needs

Kim D. Nelson

In just a little over a year, the Federal Reserve’s discount window has become a popular option for many banks interested in temporary alternative funding sources.

If you’re thinking of tapping into a temporary funding program for your financial organization, here is a quick review. The purpose of the discount window is to act as a safety valve to relieve pressures in the market for reserves. Normally, the discount window relieves temporary liquidity strains for depository institutions and the banking system; it is not intended to provide longer-term funding (with the exception of the very small seasonal credit program). However, because of the significant stress in the financial markets that started in August 2007, the Fed’s Board of Governors expanded discount window credit programs to provide longer-term liquidity to the financial system.

The Fed introduced several temporary programs for banks first. These included Term Primary Credit, which makes funding available for 90 days, and the Term Auction Facility, which makes funding available for up to 84 days. These programs are available only to financial institutions that are in “generally satisfactory” financial condition. The loans come with essentially the same requirements as a traditional discount window loan, although loans exceeding 28 days must have an excess margin of collateral for contingency short-term borrowing purposes.

After introducing the temporary programs for banks, the Board of Governors in March 2008 began exercising its authority under Section 13(3) of the Federal Reserve Act, which allows the Fed to extend credit to individuals, partnerships and corporations during what the Board determines to be “unusual and exigent circumstances.” Generally, an “unusual and exigent circumstance” presents risk of systemic insolvencies. No loans had been made under this provision since the Great Depression era of the 1930s.

The Fed established two Section 13(3) programs to help with the resolution of specific financial entities: Bear Stearns and American Insurance Group (AIG). Other Section 13(3) programs were established to “unfreeze” securities markets. These programs include the Primary Dealer Credit Facility, the Residential Mortgage-Backed Securities Facility and the Collateralized Debt Obligations Facility.

Finally, the Fed created additional Section 13(3) programs to focus on supporting money market liquidity. These programs include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility and the Money Market Investor Funding Facility.

All of these programs are temporary and will be unwound when the Board determines that current market turmoil has ended.

Information regarding traditional discount window programs is available at www.frbdiscountwindow.org. Additional details regarding Section 13(3) programs are available by e-mailing the Federal Reserve Bank of New York at general.info@ny.frb.org.

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Discount Window

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