What Is a Lending Facility?

A lending facility💙 is a mechanism that central banks use when lending funds to primary dealers such as banks, broker-dealers, or other financial institutions that are approved to conduct business with the U.S Federal Reserve🌸.

Lending facilities give financial institutions access to funds to satisfy reserve requirements, using the overnight lending market. Central banks also may use lending facilities to increase liquidity over longer periods. They generally accomplish this by using 澳洲幸运5开奖号码历史查询:term auction facilities.

How Lending Facilities Work

A lending facility is a source of funds that can support financial institutions in asking for additional capital. A lending facility can provide 澳洲幸运5开奖号码历史查询:liquidity at moments of need and can involve various assets to secure a loan. Many financial institutions can tap into lending facilities when they need additional capital to ma♏intain their targeted reserve requirements.

Lending Facility vs. Term Auction Facility

Reserve requirements are what banks must hold in cash against their customers’ deposits. The Federal Reserve's Board of Governors sets the requirement, along with the interest rate they pay banks on their excess reserves. This is according to the Financial Services Regulatory Relief Act of 2006. This rate of interest on excess reserves also serves as a proxy for the 澳洲幸运5开奖号码历史查询:federal funds rate.

Banks must secure their reserve requirements in proprietary vaults or at the closest Federal Reserve Bank. The Fed's board of governors sets reserve requirements. The reserve requirement is one of the three main tools of monetary policy. The other two tools are open market operations and the discount rate.

The Federal Reserve uses Term Auction Facilities (TAF) as part of its monetary policy to hel🎐p increase liquidity in the U.S. credit markets. TAF allows the Federal Reserve to auction fixed amounts of collateral-backed, short-term loans to depository institutions—savings banks, commercial banks, savings and༺ loan associations, and credit unions—that are in strong financial condition.

TAFs are implemented to address "elevated pressures in short-term funding markets," according to the Federal Reserve System Board of Governors.

History and Development of Lending Facilities

Lending facilities originated to enhance efficiency when de൩pository institutions required capital. Central banks often accept a variety of assets as collateral from fin꧋ancial institutions in exchange for supplying the loan.

These lending facilities can take the form of the following term auction facilities: 澳洲幸运5开奖号码历史查询:Term Securities Lending Facilities (now discontinued in the U.S.), Treasury Automated Auction Processing Systems (T𝓡AAPS🌃), or the overnight lending market.

Term Securities Lending Facilities (TSLF) were run during the Global Financial Crisis by the Fed's open market trading desk, and started as weekly lending facilities. The TSLF let primary dealers borrow U.S. Treasury securities for 28 days by putting up eligible collateral. The Fed created the TSLF in 2008 so it wouldn't have to affect currencies or securities prices while easing the 澳洲幸运5开奖号码历史查询:credit market for Treasury securities. The TSLF was closed on Feb. 1, 2010.

TAAPS is a computer system developed and run by the Fed to process bids received for Treasury 澳洲幸运5开奖号码历史查询:securities that trade through the auction process. Prior to the automated system being put into place in 1993, the Fed received bids in paper form.

The overnight lending market, on the other hand, help banks meet their reserve requirements. Banks that have more than the requirement at the end of the day lend to banks that fall short. These funds are kept at the Fed or in the receiving bank's vault.

The Bottom Line

Central banks use lending facilities when offering funds to bﷺanks, broker-dealers, or other financial institutions that are allowed to conduct business with the Fed. These facilities give the finaꦿncial institutions access to funds to ensure that they satisfy reserve requirements.

Lending facilities give liquidity when needed and can involve various assets to secure a loan. These facilities come in the form of term securities lend🌺ing facilitiജes, treasury automated auction processing systems, or the overnight lending market.