The Credit Office

Traditionally, the Fed’s Credit Office also has been known as the discount window. Its primary function is to ensure the stability of financial markets by providing short-term and intermediate-term credit to the banking system. All advances must be fully collateralized and Credit staff members analyze, evaluate and monitor the collateral used to secure advances, as well as to secure Treasury deposits and Federal Reserve account holders’ daylight and overnight overdrafts.

Lending Programs | Securing Loans | Rates | Background Information | Contact

Lending Programs

Discount window lending is administered in accordance with the Federal Reserve Act, Regulation A and various operating circulars. Federal Reserve credit is available to eligible banks, savings and loans and credit unions under three programs:

Seasonal Credit is a longer-term program that is available to financial institutions with less than $500 million in total assets and that experience yearly fluctuations in deposits and loans caused by seasonal businesses such as farming, construction and tourism. Institutions must formally apply for a Seasonal Credit line by completing an application which requires monthly historical deposit, loan, securities and fed funds data be submitted. If approved, the institution can then access its Seasonal line as funding needs dictate. Lines are normally approved for up to nine months and advances borrowed up to 30 days at a time. Please refer to the Seasonal Credit brochure for more information about this program.

Primary Credit is 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 a rate that is 50 basis points above the Federal Open Market Committee’s target for the federal funds rate.

Secondary Credit is available to financial institutions that are not eligible for primary credit. The rate on secondary credit is 50 basis points higher than the primary credit rate.

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Terms

• Generally, primary credit will be extended on very short-term basis-typically overnight. Primary credit also may be extended for up to a few weeks to small institutions that cannot obtain temporary funds in the market at reasonable terms, so long as it is in sound financial condition.
• Institutions need not seek alternative sources of funds before requesting occasional short-term advances from the primary credit program.
• There is no prohibition against using primary credit to fund sales of federal funds.
• Except in unusual circumstances, depository institutions will not be questioned about the reason for borrowing primary credit.
• Only institutions that Reserve Banks deem generally sound will be eligible to obtain primary credit. Eligibility is based largely on an institution's supervisory exam rating and capital status. (In general, institutions with composite CAMEL(S) ratings of 1, 2 or 3 that are at least adequately capitalized will be eligible for primary credit unless supplementary information indicates their condition is not generally sound. Supplementary information, such as public debt ratings and information provided by examiners and the market, also may be considered.)
• Secondary credit is for institutions that do not qualify for primary credit. The purpose of secondary credit is to assist institutions to return to relying on market funding sources. This program entails a higher level of Reserve Bank administration and oversight than primary credit.

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Securing Loans

All loans made through the discount window must be fully secured. The Fed accepts the following types of collateral:

• U.S. Treasury securities and agency obligations,
• municipal bonds,
• residential mortgages,
• commercial loans and
• other various forms of assets.

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Rates

As mentioned above, under normal conditions, primary credit will be granted on a "no questions asked" basis at a rate that is 50 basis points above the Federal Open Market Committee's target for the federal funds rate. The rate on secondary credit will be 50 basis points higher than the primary credit rate. Current rates are posted as they change. Borrowers may find these rates on the Federal Reserve System's discount window web site.

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Additional Background Information

The primary credit program aids the implementation of monetary policy by making discount window credit readily available at a rate above the FOMC's target, thus limiting how far the actual federal funds rate will rise above the target during the days when funding markets are tight. Additionally, the primary and secondary credit programs simplify the process of borrowing and promote consistency in the lending function across the Federal Reserve System.

Primary credit replaced adjustment credit in January 2003 as the principal safety valve for ensuring adequate liquidity in the banking system. Primary credit also serves as a backup source of short-term funds for sound depository institutions.

Given the above-market pricing of primary and secondary credit, the Federal Reserve believes that depository institutions will not find it advantageous to rely on the discount window as a regular source of funding.

In the view of the Federal Reserve, banking supervisors should view occasional use of primary credit as appropriate and unexceptional.

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Contact Information

More information about the Credit programs, including FAQs, can be found at the Federal Reserve System's discount window web site. If your financial institution needs to establish a borrowing relationship with the St. Louis Fed, please contact one of our credit analysts.

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