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Background and Summary of Regulation A

2-035
PURPOSE AND USE OF FEDERAL RESERVE CREDIT
Open market operations are the primary means by which the Federal Reserve System affects the overall supply of reserves. However, the Federal Reserve Banks also supply reserves to meet the credit needs of individual depository institutions, particularly during periods when money markets are tight. By statute, Reserve Banks may extend credit either by discounting eligible paper or by making an advance. Because in principle Reserve Banks can extend credit in the form of a discount, the lending facility of the Federal Reserve is colloquially referred to as the discount window, although today almost all credit extensions are in the form of an advance.
In general, any depository institution that maintains transaction accounts or nonpersonal time deposits is eligible to borrow at the discount window. However, the Federal Reserve expects depository institutions to rely on market sources of funds for their ongoing funding needs and to use central bank credit as a backup source of funding rather than a routine one. In addition, there are statutory limits on the extent to which a Reserve Bank may lend to an undercapitalized or critically undercapitalized institution, and a Reserve Bank is not obligated to extend credit to any institution.
2-036

PRIMARY CREDIT

Reserve Banks may extend primary credit on a very short-term basis (typically overnight) to depository institutions that the Reserve Banks judge to be in generally sound financial condition. Reserve Banks determine eligibility for primary credit according to a uniform set of criteria that is based mainly on examination ratings and capitalization, although Reserve Banks also may use supplementary information, including market-based information when available. Reserve Banks extend primary credit at a rate above the target federal funds rate of the Federal Open Market Committee.
Minimal administrative requirements apply to requests for overnight primary credit, unless some aspect of the credit request appears inconsistent with the conditions of primary credit (for example, if a pattern of behavior indicates strongly that an institution is using primary credit other than as a backup source of funding). Reserve Banks also may extend primary credit to eligible institutions for periods of up to several weeks if such funding is not available from other sources. However, longer-term extensions of primary credit are subject to greater administration than are overnight loans.
2-037

SECONDARY CREDIT

Secondary credit is available to institutions that do not qualify for primary credit. Secondary credit is available as a backup source of liquidity on a very short-term basis, provided that the loan is consistent with a timely return to a reliance on market sources of funds. Longer-term secondary credit is available if necessary for the orderly resolution of a troubled institution, although any such loan would have to comply with additional requirements for lending to undercapitalized and critically undercapitalized institutions. Unlike the primary credit program, secondary credit is not a minimal administration facility because Reserve Banks must obtain sufficient information about a borrower’s financial situation to ensure that an extension of credit complies with the conditions of the program. Secondary credit is available at a rate above the primary credit rate.
2-038

SEASONAL CREDIT

Seasonal credit is available under limited conditions to meet the needs of depository institutions that have seasonal patterns of movement in deposits and loans but lack ready access to national money markets. In determining a depository institution’s eligibility for seasonal credit, Reserve Banks consider not only the institution’s historical record of seasonal fluctuations in loans and deposits but also the institution’s recent and prospective needs for funds and its liquidity conditions. Generally, only very small institutions with pronounced seasonal funding needs will qualify for seasonal credit. Seasonal credit is available at a flexible rate that takes into account the rate for market sources of funds.
2-039

EMERGENCY CREDIT

In unusual and exigent circumstances and after consultation with the Board, a Reserve Bank may extend credit to individuals, partnerships, and corporations that are not depository institutions if, in the judgment of the Reserve Bank, credit is not available from other sources and failure to obtain credit would adversely affect the economy. A Reserve Bank may extend credit to a nondepository entity in the form of an advance only if the advance is secured by a direct obligation of the United States or a direct obligation of, or an obligation that is fully guaranteed as to principal and interest by, any agency of the United States. An extension of credit secured by any other type of collateral must be in the form of a discount and must be authorized by an affirmative vote of at least five members of the Board of Governors.
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