Discount Window Lending Programs and
Payments System Risk

Please note the following temporary changes to Discount Window lending programs:

• The spread of the primary credit rate over the FOMC's target federal funds rate has been reduced to 25 basis points.



• On March 17, 2008, the primary credit program was temporarily changed to allow primary credit loans for terms of up to 90 days.



• On July 30, 2008, the Federal Reserve introduced a collateral requirement for long-term advances.

These changes will remain in place until the Federal Reserve determines that market liquidity has improved.

Please see our Collateral FAQs for answers to questions frequently asked since the Federal Reserve's announcement of temporary changes to the primary credit discount window facility.

Please select a topic:

»Discount Window Lending Programs

• Primary and Secondary Credit Programs
• Seasonal Lending Program

Discount Window Lending Programs:

  Primary and Secondary Credit Programs

1. 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?
   
   
2. What are the key features of primary credit and secondary credit?
   
   
3. How do Reserve Banks administer the primary and secondary credit Discount Window programs?
   
   
4. Is a depository institution that is eligible for primary credit allowed to use the Federal Reserve as a regular source of funds?
   
   
5. 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?
   
   
6. 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?
   
   
7. How is the primary credit rate set?
   
   
8. How do bank supervisors/examiners view an institution's use of primary credit?
   
   
9. 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?
   
   
10. Does the Federal Reserve publish information about which depository institutions are allowed to borrow from the Discount Window at the primary credit rate?
    
    
11. How does the Federal Reserve publish data on borrowings under the primary and secondary credit programs?
    
    
12. The Federal Reserve describes the primary credit program as a 'no questions asked' program with minimum administration. What does that mean?
    
    
13. How many times may a depository institution borrow from the Discount Window in any given period?
    
    
14. 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?
    
    
15. In what situations may a Reserve Bank extend primary credit for consecutive days? What is the maximum period that credit can be outstanding?
    
    
16. What procedures should a depository institution follow to borrow from the Discount Window?
    
    
17. When are the proceeds of Discount Window loans made available to the borrower? When is the subsequent repayment posted?
    
    

18. What is the purpose of the seasonal lending program? Where can I find more information about the seasonal lending program?
    
    
19. Did the introduction of the primary and secondary credit programs have any impact on the seasonal credit program?
    
    
20. 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?
    
    

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.

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.

Please Note: On March 17, 2008, the primary credit program was temporarily changed to allow primary credit loans for terms of up to 90 days. Also, the spread of the primary credit rate over the FOMC's target federal funds rate has been reduced to 25 basis points. These changes will remain until the Federal Reserve determines that market liquidity has improved.

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.

5. 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.

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.

On March 17, 2008, the primary credit rate was reduced to 25 basis points above the FOMC's target for the federal funds rate. This spread will remain in place until the Federal Reserve determines that market liquidity has improved.

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.

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.

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. 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.  

No. The Federal Reserve will not publish information regarding institutions' eligibility for primary or secondary credit.

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 does not publish information about individual institution's borrowings.

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.

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.

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.

Please Note: On March 17, 2008, the primary credit program was temporarily changed to allow primary credit loans for terms of up to 90 days. Also, the spread of the primary credit rate over the FOMC's target federal funds rate has been reduced to 25 basis points. These changes will remain until the Federal Reserve determines that market liquidity has improved.

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.

A depository institution should contact its Reserve Bank using the toll free number listed below:

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 17). Please refer to The Mechanics of Borrowing for additional information.

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.

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.

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.

Yes. If an institution qualifies for and is granted a seasonal line, the institution decides when to draw on the line.

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1. May all institutions that have a Federal Reserve account incur daylight overdrafts?
   
   
2. How is a daylight overdraft fee calculated?
   
   
3. What is a net debit cap?
   
   
4. What is a “max cap”? How can an institution obtain a “max cap”?
   
   
5. What is a cap breach? When does a cap breach occur?
   
   
6. Are depository institutions responsible for ensuring that their Federal Reserve accounts are managed effectively and have non-negative balances at the end of each day?
   
   
7. Under what circumstances would an overnight overdraft charge be assessed?
   
   
8. How is an overnight overdraft charge calculated?
   
   

A daylight overdraft occurs when an institution's Federal Reserve account has a negative balance at any point during the business day. Most depository institutions that have a Federal Reserve account may incur daylight overdrafts, but certain types of financial institutions that are permitted to have Federal Reserve accounts present special risks and thus are not allowed to incur overdrafts. Examples are Edge and agreement corporations, bankers' banks (including corporate credit unions) that are not subject to reserve requirements, limited-purpose trust companies, institutions with a zero net debit cap, and (beginning July 20, 2006) government-sponsored enterprises and certain international organizations for which the Reserve Banks act as fiscal agents. Most of these institutions lack regular Discount Window access. Institutions that do not have regular access to the Discount Window should not incur daylight or overnight overdrafts in their Federal Reserve accounts.

The Federal Reserve charges institutions fees for daylight overdrafts incurred in their Federal Reserve accounts. For each two-week reserve maintenance period, the Reserve Banks calculate and assess daylight overdraft fees, which are equal to the sum of any daily overdraft fees during the reserve maintenance period. For each day, an institution's daylight overdraft fee is the effective daily rate charged for daylight overdrafts multiplied by the average daylight overdraft for the day minus a deductible (a free amount of daylight credit). For certain institutions that do not have regular discount window access and should not incur daylight overdrafts, the Reserve Bank charges a penalty fee on average daily overdrafts. For details on the daylight overdraft fee calculations please refer to the Guide to the Federal Reserve's Payments System Risk Policy on Daylight Credit [PDF; 692K].

An institution's daylight overdraft net debit cap (“cap”) refers to the maximum dollar amount of uncollateralized daylight overdrafts the institution is authorized to incur in its Federal Reserve account. The dollar amount of the net debit cap is determined by an institution's cap category and its reported capital.

Maximum daylight overdraft capacity (“max cap”) is the total amount of daylight overdraft capacity, above an institution's net debit cap, that is secured by collateral. A depository institution with a self assessed cap that may potentially exceed its net debit cap may request a max cap from its Reserve Bank. The institution must provide a business case providing the total amount of capacity desired and a justification for requesting a max cap. If the Reserve Bank approves a depository institution's request for a max cap, the institution must provide written approval from its board of directors and provide collateral that is acceptable to the Reserve Bank.

A cap breach occurs when an institution's account balance for a particular day shows one or more negative end-of-minute account balances larger than its single-day net debit cap or its “max cap” (single-day cap plus its collateralized capacity) . In addition, a cap breach would occur if an institution's average peak daily overdraft over a reserve maintenance period were greater than its two-week average cap or its “max cap” (two-week-average cap plus its collateralized capacity).

Yes. Each account holder must have procedures in place to manage its account effectively and to ensure that it has a non-negative balance in its account at the end of each day. Reserve Banks provide tools to assist account holders in managing their Federal Reserve accounts, but these tools should not replace an institution's own internal controls for managing its account.

If an overnight overdraft is not attributable to a Reserve Bank error, the account holder normally will be assessed an overnight overdraft fee. The account holder is responsible for managing its account, so it will be charged for overnight overdrafts resulting from an error by a correspondent or other third party. In some cases, overnight overdrafts may be subject to a penalty fee.

8. How is an overnight overdraft charge calculated?

Amount of the overnight overdraft x (federal funds rate plus 4 percentage points) / 360 days

The minimum charge is $100. An overnight overdraft extending over a weekend or Reserve Bank holiday is usually considered one occurrence, though the Reserve Bank may assess a charge for each day that the negative balance is outstanding. If an institution incurs an excessive number of overnight overdrafts (more than three occurrences in any 12-month period), the overnight overdraft rate increases by one percentage point for each additional occurrence. Moreover, the Reserve Bank will take additional actions to minimize continued overnight overdrafts. These actions are similar to those taken in response to net debit cap violations (for more details please see the Account Management Guide [PDF; 10,845K]).

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