Primary Credit Program (the "Discount Program Modification") (Fed)

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The Primary Credit Program (the “Discount Program Modification”) (Fed)

Primary Credit program was an existing program loaning funds to banks overnight that was dramatically expanded in August 2007. The Federal Reserve eventually expanded the loans from 1 day to 90 and from 1 percentage point over the target federal funds rate down to ¼ percentage point. In early 2010, the program was gradually brought back to its original terms. Loans to banks crested at $111.946 billion on Oct. 29, 2009. As of Feb. 17, 2010, $14.263 billion was still outstanding.[1]

Wall Street Bailout Accounting
(back to main table)
PRIMARY CREDIT PROGRAM (THE “DISCOUNT PROGRAM MODIFICATION”) (FED)
Balance Sheet
Disbursed*: $111.9B [2]
Current outstanding: $0.02B[3]
Public Funds
Maximum at-risk: At least $111.9B [4]
Current at-risk: $104M$0.0B[5]

* See the methodology and glossary for definitions of "disbursed," etc.

Funding agency and aid type

The funding agency was the Federal Reserve.

Below-market loans.

Who benefits

Banks (Federal Reserve depositors)

Background

SIGTARP:[6]

“Primary Credit Program (the ‘Discount Program Modification’) — Total Potential Support: At Least $111.9 Billion. Primary credit loans are taken by banks at the Federal Reserve’s discount window when they require short-term funds to meet the needs of their customers and creditors. Normally, the Federal Reserve lends at a fixed rate and the bank must post suitable collateral, subject to a haircut. In August 2007, the Federal Reserve set the term at 30 days and approved a 50-basis-point reduction in the primary credit rate to narrow the spread to 50 basis points, or 0.5%, in response to the liquidity crisis in the banking system. Accessibility was broadened in March 2008, as the interest rate was lowered to 25 basis points over the FOMC target federal funds rate, and the term has been lengthened from 30 to 90 days, renewable by the borrower.”

Via Prins:[7]

“The Discount Window functions as a safety valve in relieving pressures in reserve markets; extensions of credit can help alleviate liquidity strains in a depository institution and in the banking system as a whole. It also helps ensure the basic stability of the payment system by supplying liquidity during times of systemic stress. In order to borrow from the New York Fed, an institution must have on file the necessary authorizing resolutions and agreements, as described in Operating Circular 10 as well as pre-approved eligible collateral.”

Prins:[8]

“The Fed provided $112 billion to offer loans at a discounted rate to eligible institutions in 2009.”

Notes

The program existed prior to the financial crisis, but loans to institutions had not exceeded $1 billion prior to the change in terms in August 2007. Loans to banks crested at $111.946 billion on Oct. 29, 2009.[9]

On Aug. 17, 2007, the Federal Reserve announced that it was lengthening the loan terms under the program from overnight to 30 days and reduced the spread of the primary credit (“discount”) rate to ½ percentage point from 1 percentage point over the FOMC target rate. On Mar. 16, 2008, the Federal Reserve again extended the term to 90 days and again lowered the primary credit rate to ¼ percentage point over FOMC target. Effective Jan. 14, 2010, the Federal Reserve reduced the typical maximum maturity back to 28 days. Effective Feb. 19, 2010, the primary credit rate would be increased to ½ percentage point over the FOMC target (effectively ½ to ¾ percent) and that, effective Mar. 18, 2010, the term would be shortened once again to overnight.[10]

On Feb. 18, 2010, the Federal Reserve announced that Easing the terms of primary credit was one of the Federal Reserve's first responses to the financial crisis. On August 17, 2007, the Federal Reserve reduced the spread of the primary credit rate over the FOMC's target for the federal funds rate to 1/2 percentage point, from 1 percentage point, and lengthened the typical maximum maturity from overnight to 30 days. On December 12, 2007, the Federal Reserve created the TAF to further improve the access of depository institutions to term funding. On March 16, 2008, the Federal Reserve lowered the spread of the primary credit rate over the target federal funds rate to 1/4 percentage point and extended the maximum maturity of primary credit loans to 90 days.

Articles and resources

Related SourceWatch articles

References

  1. Federal Reserve Bank of St. Louis, http://research.stlouisfed.org/fred2/series/WPC and http://research.stlouisfed.org/fred2/data/WPC.txt accessed Feb. 21, 2010.
  2. Federal Reserve Bank of St. Louis, “Series: WPC - Reserve Bank Credit - Loans to Depository Institutions - Primary Credit,” March 12, 2010. Note: Using the maximum crest figure.
  3. Precise figure is $18 million. Federal Reserve Bank of St. Louis, “Series: WPC - Reserve Bank Credit - Loans to Depository Institutions - Primary Credit,” Jun. 29, 2011.
  4. Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), ”“Quarterly Report to Congress – July 21, 2009," p. 142.
  5. Precise figure is $41 million. Federal Reserve Bank of St. Louis, “Series: WPC - Reserve Bank Credit - Loans to Depository Institutions - Primary Credit,” July 14, 2010.
  6. SIGTARP July 2009 report, p. 142.
  7. Board of Governors of the Federal Reserve System, “Factors Supplying Reserve Balances: Detail for Loans”, H.41 Table 6, (accessed September 10, 2009); Federal Reserve Bank of New York, Discount Window, http://www.newyorkfed.org/banking/discountwindow.html (accessed September 10, 2009).
  8. Prins’ Mother Jones analysis. Dec. 21, 2009. http://motherjones.com/politics/2009/12/behind-real-size-bailout
  9. Federal Reserve Bank of St. Louis, http://research.stlouisfed.org/fred2/series/WPC and http://research.stlouisfed.org/fred2/data/WPC.txt accessed Feb. 21, 2010.
  10. Federal Reserve press release, Feb. 18, 2010, http://www.federalreserve.gov/newsevents/press/monetary/20100218a.htm accessed Feb. 21, 2010.

External resources

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