Financial Institutions Management: A Risk Management Approach 10th Edition by Anthony Saunders Solu

  Treasury securities              + $1 b            Reserve account of                  + $1 b
securities dealers’ banks      
----------------------------------------------------------------------------------------------------
                             Change in Commercial Bank Balance Sheets                                                
 
                          Assets                                                      Liabilities                                  
Reserve accounts                     + $1 b Securities dealers’ demand      + $1 b
              at Federal Reserve                         deposit accounts                                            
 
35.   Explain how a decrease in the discount rate affects credit availability and the money supply.
 
Changing the discount rate signals to the market and the economy that the Federal Reserve would like to see higher or lower rates in the economy. Thus, the discount rate is like a signal of the FOMC’s intention regarding the tenor of monetary policy. For example, raising the discount rate “signals” that the Fed would like to see a tightening of monetary conditions and higher interest rates in general (and a relatively lower amount of borrowing). Lowering the discount rate “signals” a desire to see more expansionary monetary conditions and lower interest rates in general.
 
36.   What changes did the Fed implement to its discount window lending policy in the early 2000s?
 
In January 2003, the Fed implemented changes to its discount window lending that increased the cost of borrowing but eased the terms. Specifically, three lending programs are now offered through the Feds discount window. Primary credit is available to generally sound depository institutions on a very short-term basis, typically overnight, at a rate above the Federal Open 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.  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.