General Information
The Primary & Secondary Lending Programs
1. Overview
Federal Reserve lending to depository institutions (the “discount window”) plays an important role in supporting the liquidity and stability of the banking system and the effective implementation of monetary policy. By providing ready access to funding, the discount window helps depository institutions manage their liquidity risks efficiently and avoid actions that have negative consequences for their customers, such as withdrawing credit during times of market stress. Thus, the discount window supports the smooth flow of credit to households and businesses. Providing liquidity in this way is one of the original purposes of the Federal Reserve System and other central banks around the world.
When the Federal Reserve System was established in 1913, lending reserve funds through the discount window was intended as the principal instrument of central banking operations. Although the discount window was long ago superseded by open market operations as the most important tool of monetary policy, it still plays a complementary role.
The "Primary Credit" program is the principal safety valve for ensuring adequate liquidity in the banking system. Primary credit is priced relative to the FOMC’s target range for the federal funds rate and is normally granted on a “no-questions-asked,” minimally administered basis. There are no restrictions on borrowers’ use of primary credit.
On March 15, 2020, the Federal Reserve announced changes to primary credit. These changes included the following:
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Narrowing the spread of the primary credit rate relative to the general level of overnight interest rates to help encourage more active use of the window by depository institutions to meet unexpected funding needs.
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Announcing that depository institutions may borrow from the discount window for periods as long as 90 days, prepayable and renewable by the borrower on a daily basis.
Priced slightly higher, "Secondary Credit" is available to depository institutions not eligible for primary credit. Secondary credit entails a higher level of administration.
Terms & Features
To access the discount window, eligible depository institutions first must execute the necessary documentation and pledge collateral to the Federal Reserve.
| Feature | Primary Credit | Secondary Credit |
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| Rate | The rate is set relative to the FOMC's target range for the federal funds rate. | Primary credit rate plus 50 basis points1. |
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| Term | Provided for periods as long as 90 days. | Short-term, usually overnight. Can be extended for a longer term if such credit would facilitate a timely return to reliance on market funding or an orderly resolution of a failing institution, subject to statutory requirements (FDICIA restrictions). |
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| Eligibility | Depository institutions in generally sound financial condition. | Depository institutions that do not qualify for primary credit. |
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| Use | Generally no restrictions. May be used to fund sales of federal funds. | As a backup source of funding on a very short-term basis, or to facilitate an orderly resolution of serious financial difficulties. |
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| Administration | Ordinarily no questions asked. | Reserve Banks will collect information necessary to confirm that borrowing is consistent with the objectives of the program. |
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Eligibility
Depository institutions to which the law grants access to the discount window and which the Federal Reserve deems generally sound are eligible to obtain primary credit. Reserve Banks determine eligibility on an ongoing basis using supervisory ratings and capitalization data; supplementary information, when available, may also be used.
| Examination Rating (CAMELS or equivalent) |
Capital Designation | Generally Eligible For |
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| 1, 2, or 3 | Adequately or well capitalized | Primary Credit |
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| 4 or 5 | Any | Secondary Credit |
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| Any | Less than Adequately Capitalized | Secondary Credit |
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2. For Depository Institutions
By providing ready access to funding, the discount window helps depository institutions manage their liquidity risks efficiently and avoid actions that have negative consequences for their customers, such as withdrawing credit during times of market stress.
The minimal administration of the primary credit program makes it a convenient and ready source of funding for qualifying institutions. Moreover, only generally sound institutions are eligible to borrow primary credit, so borrowing primary credit should not be seen a sign of financial weakness.
Generally, there are no restrictions on borrowers’ use of primary credit. Here are some examples of common borrowing situations:
- Tight money markets or undue market volatility
- Preventing an overnight overdraft
- Meeting a need for funding, including a short-term liquidity demand that may arise from unexpected deposit withdrawals or a spike in loan demand
- Arbitrage opportunities
Secondary credit is subject to a higher level of lending administration than primary credit. Examples of appropriate uses of secondary credit include:
- Tight money markets or undue market volatility
- Addressing an overnight overdraft
- Meeting a need for backup funding, including a short-term liquidity demand
- Inability to obtain funding from normal sources
- To assist the primary regulator in prompt closure of a troubled institution
Inappropriate Situations for Borrowing Secondary Credit:
3. For Bank Examiners
The introduction of the primary credit program in 2003 marked a fundamental shift - from administration to pricing - in the Federal Reserve's approach to discount window lending. Notably, eligible depository institutions may obtain primary credit without exhausting or even seeking funds from alternative sources. Minimal administration of and restrictions on the use of primary credit makes it a reliable funding source. Being prepared to borrow primary credit enhances an institution's liquidity.
Footnotes:
1. The spread of the primary credit rate over the FOMC's target federal funds rate was initially 100 basis points. During the financial crisis, this spread was reduced to 50 basis points on August 17, 2007, and was further reduced, to 25 basis points, on March 16, 2008. Effective February 19, 2010, the spread of the primary credit rate over the FOMC's target range for the federal funds rate was increased to 50 basis points. Effective March 16, 2020 the primary credit rate was set at the top of the FOMC target range for the federal funds rate. The Federal Reserve will assess over time whether further increases in the spread are appropriate.