THE DISCOUNT WINDOW

Three borrowing programs:

Adjustment credit

Seasonal credit

"Other extended credit"

Adjustment credit:

Overnight

Below-market interest rate set by the FOMC as part of monetary policy

Subject to unwritten frequency guidelines ("administration of the window")

Seasonal credit:

Borrowed for several weeks or months

Market rate determined by formula

Qualifying banks only: recent history of seasonal swings; assets <$200MM

Other extended credit:

Penalty rate (above market)

For severely distressed banks

Rarely used

Legal limitations:

Every loan must be fully collateralized.

Borrowing banks must first have exhausted all "reasonably available alternative sources of credit."

FDIC Improvement Act of 1991: If the Fed lends too long to undercapitalized banks that subsequently fail, it incurs a financial liability to the FDIC and must write a report to Congress defending the loans.