Released by the US central bank on Tuesday:
In light of the continued improvement in financial market conditions, the Federal Reserve Board on Tuesday announced that it approved a reduction in the maximum maturity of primary credit loans at the discount window for depository institutions to 28 days from 90 days effective January 14, 2010. Primary credit loans will remain eligible for renewal upon request of the borrower.
Prior to August 2007, the maximum available term of primary credit was generally overnight. The Federal Reserve lengthened the maximum maturity first to 30 days on August 17, 2007 and then to 90 days on March 16, 2008 in order to enhance banks’ access to term funds and thus support their ability to lend to households and businesses.
Over the course of the crisis, the Fed also shrank the spread between the primary credit rate and the Fed funds rate from 100 basis points to just 25.
Now, some market participants are spinning this as evidence of the Fed taking liquidity out of the market. Yet the latest data on this subject – Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Federal Reserve Banks – paints a different picture.
The use of this facility, which was only available to “depository institutions in generally sound financial condition“, has declined significantly. Primary credit loans have shrunk from $75bn outstanding this time last year to under $20bn now.
That said, it’s another sign of normalisation and very probably a harbinger of things to come.
Related link:
Talf-tastic CMBS – FT Alphaville