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Release Date: May 17, 2002

For immediate release

The Board of Governors on Friday requested public comment on a proposal to revise the Federal Reserve's discount window programs, which provide credit to help depository institutions meet temporary liquidity needs.

Adoption of the proposal would not entail a change in the stance of monetary policy. The Federal Open Market Committee's target for the federal funds rate would not change as a result of this proposal and the level of market rates more generally would be unaffected.

The Board is proposing the establishment of a new type of discount window credit, to be called primary credit. It would replace adjustment credit, which currently is extended at a below-market rate.

Primary credit would be available for very short terms as a backup source of liquidity to depository institutions that are in generally sound financial condition. It would be extended at a rate that would be above the usual level of short-term market interest rates, including the federal funds rate.

The primary credit program would be broadly similar to mechanisms used by many other major central banks.

The interest rate for primary credit would be set through a procedure identical to that currently used for the basic discount rate. Under the proposal, the interest rate on primary credit would initially be set at 100 basis points above the target federal funds rate. Thereafter, Reserve Banks would set the rate, subject to review and determination by the Board of Governors.

By restricting eligibility to generally sound institutions and by eliminating the incentive for institutions to borrow to exploit the positive spread of money market rates over the discount rate, the primary credit program should considerably reduce the need for the Federal Reserve to review the funding situations of borrowers.

The Federal Reserve expects that, as a result of this reduced administration, institutions' willingness to use the window when money markets tighten should increase, limiting potential volatility in the federal funds rate.

Another element of the proposal is the establishment of a secondary credit program in place of the existing extended credit program. Secondary credit would be available in appropriate circumstances to depository institutions that do not qualify for primary credit. Secondary credit would be extended at an interest rate 50 basis points above the primary discount rate.

The proposal also contains certain minor technical changes to the Board's Regulation A that are independent of the primary and secondary credit proposals.

Comments are due ninety days after publication in the Federal Register, expected soon.

Attachment (48 KB PDF)

2002 Banking and consumer regulatory policy

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Last update: May 17, 2002