THE DISCOUNT WINDOW
Three borrowing programs:
"Other extended credit"
Below-market interest rate set by the FOMC as part of monetary policy
Subject to unwritten frequency guidelines ("administration of the window")
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
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.