DISCOUNT WINDOW

DISCOUNT WINDOW
2009121116421760312
After the adoption of the Act on the liberalization of Deposit institutions and monetary control in 1980 all Depository institutions have had access to the “discount window” the fed. Individuals, partnerships (partnerships) and corporations may also use the discount window for loans under “unusual urgent circumstances.” In fact, the discount window allows the fed to be considered a national lender of last resort. Thus, the discount window adds to the stability of the financial system, especially in times of crisis.The act on the Federal reserve of 1913 requires that all the loans extended through the discount window, were secured. In practice, as collateral, are securities of the U.S. government. The interest charged on the loans granted via the discount window is called the discount rate. This rate is set by the boards of Directors of regional reserve banks every 14 days, but must be approved by the governing Council. Although each district theoretically, the fed can have a different discount rate, in practice this rate is the same for all 12 districts as the US economy is highly integrated. The discount rate is changed infrequently. So, in the decade of 1980-ies, for example, this rate has varied only 28 times with intervals between each change from 2 weeks to 20 months. Historically, the minimum rate was 0.5% in the period between 1942 and 1946; the maximum rate of 14% had acted from may to November 1981.Currently the term “discount rate” is not quite correct. Today the fed issued loans accumulate interest that is paid at maturity. However, until 1971, the fed gave out loans on the basis of the discount, i.e. the interest on the loan was deducted at the time of its provision. The term “discount window” originated from the fact that in the past for a loan, banks had to bring securities that serve as collateral, and pass them through the window of the cashier. Sometimes the fed rate increases by 2-4%, especially for large Depository institutions that use the discount window too often. The purpose of this enhancement is to minimize the abuse. In fact, the discount window is perceived as an extreme measure to which the institution may be resorted to in the absence of other opportunities to meet their obligations. In other words, the fed is considering the use of the discount window as a privilege not as a right.

The loans extended through the discount window, usually in the form of loans adjustment (credit adjustment), i.e. loans to cover short term shortage of reserves. The fed also provides seasonal loans to small institutions to help them cope with seasonal fluctuations in the inflow or outflow of funds. Seasonal loans available institutions with funds on Deposit in excess of $ 500 million, since, according to the fed, such institutions are able to cover their needs through the money market. These forms of loans are independent from each other, that is, the presence of seasonal loans does not affect the possibility of raising the Deposit adjustment lending Institute.

Changes in interest rates affect the cost of capital for Depository institutions reserves to support growth of deposits. Because of changes in interest rates affect the behavior of Depository institutions, it is an essential tool for the implementation of monetary policy.
THE FED’S BALANCE SHEET

The majority of the assets invested in securities of the U.S. government – securities account for more than 85% of the balance sheet. For comparison, loans to Depository institutions, represent less than 1%. Since the securities are held in the open market, and the loans are issued through the discount window, it’s obvious how the operations in the open market as a tool of monetary policy is more important than the loans.

Among the liabilities the largest share is Federal reserve banknotes. This amount is expressed in nearly all the currency in the country. The share of banknotes of the Federal reserve is about 88% of the total balance. The next most deposits are about 8 percent.