General Information

The Primary & Secondary Lending Programs

  1. Overview
  2. For Depository Institutions
  3. For Bank Examiners

1. Overview

The Federal Reserve's discount window serves many purposes for depository institutions and the economy. It functions as a safety valve in relieving pressures in reserve markets, and extensions of credit can help relieve liquidity strains in a depository institution and in the banking system as a whole. By supplying liquidity during times of systemic stress, the discount window also helps to assure the basic stability of the payments system more generally.

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 Although the discount window was long ago superseded by open market operations as the most important tool of monetary policy, it still plays a complementary role.

Banks and other depository institutions traditionally have borrowed from the Federal Reserve's discount window when they face a temporary, unexpected, need for funds.

The "Primary Credit" program is the principal safety valve for ensuring adequate liquidity in the banking system; it is a backup source of short-term funds for sound depository institutions. Primary credit is priced at a rate above the FOMC’s target 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.

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
Rate Above the FOMC's target for the federal funds rate. Primary credit rate plus 50 basis points1.

Term Overnight. 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).

Eligibility Depository institutions in generally sound financial condition; same as eligibility for daylight credit. Depository institutions that do not qualify for primary credit.

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.

Administration Ordinarily no questions asked. Reserve Banks will collect information necessary to confirm that borrowing is consistent with the objectives of the program.

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
1, 2, or 3 Adequately or well capitalized Primary Credit

4 or 5 Any Secondary Credit

Any Less than Adequately Capitalized Secondary Credit

2. For Depository Institutions

The discount window lending programs represent an additional backup funding option for eligible depository institutions seeking to supplement their funding sources, especially to meet unexpected, short-term funding needs. For many depository institutions, particularly those with more limited access to wholesale funding markets, the primary credit program eliminates the need to bid for funds in the marketplace when available funds are tight.

The minimal administration of the new program makes it a convenient and ready source of backup funding for qualifying institutions faced with situations such as an unexpected increase in loan demand, loss of deposits, or reserve account shortfall. Moreover, only generally sound institutions are eligible to borrow primary credit, so borrowing primary credit should not be seen a sign of financial weakness.

Likely Situations for Borrowing Primary Credit:

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 backup funding, including a short-term liquidity demand that may arise from unexpected deposit withdrawals or a spike in loan demand
  • Arbitrage opportunities

Appropriate Situations for Borrowing Secondary Credit:

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:

  • Arbitrage opportunities
  • To facilitate balance sheet expansion

3. For Bank Examiners

The introduction of the primary credit program in 2003link off site marked a fundamental shift - from administration to pricing - in the Federal Reserve's approach to discount window lending. Notably, eligible depository institutions may obtain short-term 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 short-term backup funding source. Being prepared to borrow primary credit — like access to any other backup liquidity facility — enhances an institution's liquidity.

Bank examiners should view occasional use of primary credit as appropriate and unexceptional. Please see the Interagency Advisory on the Use of the Federal Reserve's Primary Credit Program in Effective Liquidity Management for more information.

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 federal funds rate was increased to 50 basis points. The Federal Reserve will assess over time whether further increases in the spread are appropriate.