Happy LAST Thursday of 2022 r/superstonk! Neighborhood jellyfish here and I would like to revisit our discussion, 'Primary Credit'--the principal safety valve for ensuring adequate liquidity in the banking system that has banks borrowing cash from the Fed at 4.5% to the tune of $4.638 billion this past week a change of 1.47% from last week, 532.7% from one year ago, and an average growth rate of 40.94K%.
Federal Reserve lending to depository institutions (the “discount window”) plays an important role in supporting the liquidity and stability of the banking system and the effective implementation of monetary policy. By providing ready access to funding, the discount window helps depository institutions manage their liquidity risks efficiently and avoid actions that have negative consequences for their customers, such as withdrawing credit during times of market stress. Thus, the discount window supports the smooth flow of credit to households and businesses. Providing liquidity in this way is one of the original purposes of the Federal Reserve System and other central banks around the world.
The "Primary Credit" program is the principal safety valve for ensuring adequate liquidity in the banking system. Primary credit is priced relative to the FOMC’s target range for the federal funds rate and is normally granted on a “no-questions-asked,” minimally administered basis. There are no restrictions on borrowers’ use of primary credit.
- Tight money markets or undue market volatility
- Preventing an overnight overdraft
- Meeting a need for funding, including a short-term liquidity demand that may arise from unexpected deposit withdrawals or a spike in loan demand
The introduction of the primary credit program in 2003 marked a fundamental shift - from administration to pricing - in the Federal Reserve's approach to discount window lending. Notably, eligible depository institutions may obtain primary credit without exhausting or even seeking funds from alternative sources. Minimal administration of and restrictions on the use of primary credit makes it a reliable funding source. Being prepared to borrow primary credit enhances an institution's liquidity.
Why is this so interesting?
A lot of banks have a ton of cash right now! We see this with the current reserves at $3.126 Trillion.
What are reserves? They are when the banks put cash on deposit at the Fed and the Fed pays them interest. Why won't they lend to each other? If they are all so financially stable, wouldn't that be an easy way to undercut the Fed and make 4.45%? (make more that IORB while helping another 'sound friend' save a little?)
So back to Primary Credit, I wonder which institution(s) are seeking “no-questions-asked” "no restrictions on borrowers’ use of primary credit." to the tune of $4.638 billion this past week a change of 1.47% from last week, 532.7% from one year ago, and an average growth rate of 40.94K%.
TL:DRS: The steady and consistent rise in Primary Credit continues as big players are trying to get as much liquidity backstop as possible and are increasing their borrowing from the Fed, happily paying 4.5% to borrow billions.