Agencies Issue Guidance on Use of Discount Window
WWR Article - August 1, 2003
Bank regulators issued guidance this week on liquidity management and the use of the two Federal Reserve discount window programs that were introduced last January to replace the previous "adjustment credit" and "extended credit" programs. The new discount window programs offer banks an additional source of back-up funds for managing short-term liquidity risks and can enhance the diversification of contingency funds, the agencies said.
Under the new "primary credit" program, Federal Reserve Banks will extend short-term, usually overnight, credit to banks with CAMELS ratings 3 or higher at interest rates 100 basis points above the federal funds target rate. There are no restrictions on the use of primary credit. The program does not require banks to seek alternative sources of funds before requesting the credit and the Reserve Banks will not question the bank about its reasons for borrowing. Borrowers in this program can also use consumer and commercial loans as collateral.
The banking agencies recommend that if a bank incorporates primary credit into its liquidity contingency plans, the bank should ensure that it has in place with the appropriate Reserve Bank the necessary collateral arrangements and documentation. Banks should periodically test their source of contingency funding and should occasionally borrow at the discount window to ensure that there are no unexpected impediments or complications in the case that such contingency lines need to be utilized.
Supervisors should view the occasional use of primary credit as appropriate and unexceptional, according to the guidance. At the same time, however, supervisors and examiners should be cognizant of the implications that too frequent use of the discount window may have on the overall safety and soundness of the institution.
Banks not qualifying for the primary credit program can get credit under the "secondary credit" program. However, this program entails a higher level of Reserve Bank administration and oversight than primary credit program and the interest rate is generally 50 basis points higher than the primary program's rate.