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Release Date: October 31, 2002

For immediate release

The Board of Governors on Thursday approved a final rule that revises the Federal Reserve's discount window programs, which provide credit to help depository institutions meet temporary liquidity needs.

The rule amends the Board's Regulation A, effective January 9, 2003. It is substantially similar to a proposal that the Board published for a ninety-day public comment period on May 24, 2002.

The rule does not entail a change in the stance of monetary policy. The Federal Open Market Committee's target for the federal funds rate will not change as a result of the adoption of these programs, and the level of market interest rates more generally will be unaffected.

The rule replaces adjustment credit, which currently is extended at a below-market rate, with a new type of discount window credit called primary credit that will be broadly similar to credit programs offered by many other major central banks. Primary credit will be available for very short terms as a backup source of liquidity to depository institutions that are in generally sound financial condition in the judgment of the lending Federal Reserve Bank. The Board expects that most depository institutions will qualify for primary credit.

Reserve Banks will extend primary credit at a rate above the federal funds rate, which should eliminate the incentive for institutions to borrow for the purpose of exploiting the positive spread of money market rates over the discount rate. The Board anticipates that the primary credit rate will be set initially at 100 basis points above the FOMC's target federal funds rate.

Reserve Banks will establish the primary credit rate at least every two weeks, subject to review and determination of the Board of Governors, through the same procedure currently used to set the adjustment credit rate. The final rule includes a provision that could facilitate a reduction in the primary credit rate in a financial emergency.

By employing an above-market rate and restricting eligibility to generally sound institutions, the primary credit program should considerably reduce the need for the Federal Reserve to review the funding situations of borrowers and monitor the use of borrowed funds. This reduced administration in turn should make the discount window a more attractive funding source for depository institutions when money markets tighten.

The Board's final rule also establishes a secondary credit program that will be available in appropriate circumstances to depository institutions that do not qualify for primary credit. The Board anticipates that Reserve Banks will initially establish a secondary credit rate at a level 50 basis points above the primary credit rate.

The Board made no substantive changes to the seasonal credit program.

The Board also approved a related technical amendment to the reserve deficiency penalty provision of Regulation D.

The final rule is attached.

Attachment (148 KB PDF)

2002 Banking and consumer regulatory policy

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Last update: October 31, 2002