vol. XX no. 3
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In
2007, when Brian Bowling took over risk management at the discount
window of the Federal Reserve Bank of Atlanta, lending was less than
$250 million. But in just one year, as the credit crisis grew, so did
the window’s activity, soaring to $85 billion. With that volume comes
an inherent elevation in risk, says Bowling, assistant vice president
of the bank’s supervision and regulation division.
Originally,
the discount window was the Fed’s principal instrument to lend reserve
funds. However, as open markets grew, financial institutions began to
go elsewhere for more competitive loans because the discount window
offers above-market rates. In these times of economic instability, more
banks are returning to the discount window, and in response, the
Atlanta Fed has expanded programs to service a higher volume and larger
variety of loans.
That increase in volume, and subsequently
risk, presents a double bind. “The central bank has a unique dual
role,” Bowling says. “We have a responsibility to provide liquidity to
the system, but at the same time, we are protecting the reserve bank’s
assets.”
Currently the Atlanta Fed’s discount window serves
600 financial institutions across the Southeast—including banks,
thrifts, and credit unions. It offers primary, secondary, and seasonal
credit as well as funds through an auction, created to deal with
current illiquidity in lending markets between banks. Primary credit is
extended for up to 90 days to healthy financial institutions. Secondary
credit is extended for short terms (usually overnight) to institutions
that qualify for a loan with more restrictive terms and oversight. The
discount window also offers seasonal credit to financial institutions
with seasonal liquidity patterns.
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