PURPOSE AND USE
OF FEDERAL RESERVE CREDITOpen market operations
are the primary means by which the Federal Reserve System affects
the overall supply of reserves. However, the Federal Reserve Banks
also supply reserves to meet the credit needs of individual depository
institutions, particularly during periods when money markets are tight.
By statute, Reserve Banks may extend credit either by discounting
eligible paper or by making an advance. Because in principle Reserve
Banks can extend credit in the form of a discount, the lending facility
of the Federal Reserve is colloquially referred to as the discount
window, although today almost all credit extensions are in the form
of an advance.
In general, any depository institution that maintains
transaction accounts or nonpersonal time deposits is eligible to borrow
at the discount window. However, the Federal Reserve expects depository
institutions to rely on market sources of funds for their ongoing
funding needs and to use central bank credit as a backup source of
funding rather than a routine one. In addition, there are statutory
limits on the extent to which a Reserve Bank may lend to an undercapitalized
or critically undercapitalized institution, and a Reserve Bank is
not obligated to extend credit to any institution.