Primary credit may be used for any purpose including financing the sale of fed

Primary credit may be used for any purpose including

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Market Committee's (FOMC) target rate for federal funds. Primary credit may be used for any purpose, including financing the sale of fed funds. Primary credit may be extended for periods of up to a few weeks to depository institutions in generally sound financial condition that cannot obtain temporary funds in the financial markets at reasonable terms. Secondary credit is available to depository institutions that are not eligible for primary credit. It is extended on a very short- term basis, typically overnight, at a rate that is above the primary credit rate. Secondary credit is available to meet backup liquidity needs when its use is consistent with a timely return to a reliance on market sources of funding or the orderly resolution of a troubled institution. 26
Secondary credit may not be used to fund an expansion of the borrower’s assets. The Federal Reserve's seasonal credit program is designed to assist small depository institutions in managing significant seasonal swings in their loans and deposits. Seasonal credit is available to depository institutions that can demonstrate a clear pattern of recurring intra-yearly swings in funding needs. Eligible institutions are usually located in agricultural or tourist areas. Under the seasonal program, borrowers may obtain longer term funds from the discount window during periods of seasonal need so that they can carry fewer liquid assets during the rest of the year and make more funds available for local lending. With the change, discount window loans to healthy banks would be priced at 1 percent above the fed funds rate rather than below as it generally was in the period preceding January 2003. Loans to troubled banks would cost 1.5 percent above the fed funds rate. The changes were not intended to change the Fed = s use of the discount window to implement monetary policy, but significantly increase the discount rate while making it easier to get a discount window loan. By increasing banks = use of the discount window as a source of funding, the Fed hopes to reduce volatility in the fed funds market as well. The change also allows healthy banks to borrow from the Fed regardless of the availability of private funds. Previously, the Fed required borrowers to prove they could not get funds from the private sector, which put a stigma on discount window borrowing. With the changes, the Fed will lend to all banks, but the subsidy of below fed fund rate borrowing will be gone. 14. a. Panel A: Initial Balance Sheets Federal Reserve Bank Assets Liabilities Securities $60m Reserve accounts $60m --------------------------------------------------------------------------------------------- Bank Three Assets Liabilities Loans $540m Transaction deposits $600m Reserve deposits 60m at Fed Panel B: Balance Sheet after All Changes Resulting from Decrease in Reserve Requirement Federal Reserve Bank Assets Liabilities Securities $60m Reserve accounts $60m -------------------------------------------------------------------------------------------------- Bank Three Assets Liabilities Loans $690m Transaction deposits $750m ($75 - $60) ($60 0.08) Reserve deposits 60m at Fed 27
b. Panel A: Initial Balance Sheets Federal Reserve Bank Assets Liabilities Securities $60m Reserve accounts $60m --------------------------------------------------------------------------------------------- Bank Three Assets Liabilities Loans $540m

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