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Discount Window Reflects Changing Credit Conditions

The 12 regional Federal Reserve Banks play a key role as part of the nation's central bank by serving as lender of last resort and making short-term loans to solvent financial institutions against acceptable collateral. Sometimes such loans are needed simply because the ebb and flow of business may bring more withdrawals than deposits on a given day. In other cases, emergency loans are needed, perhaps after flash floods in a small locale, or major disasters such as Hurricane Katrina, or even after the terrorist attacks of September 11, 2001. The Fed has also served as lender of last resort when other interbank markets have stopped because of a deep recession or financial crisis.

In 2009, the Philadelphia Fed was still lending to banks through the discount window far above pre-crisis levels. In 2009, the Philadelphia Fed's discount window made 1,295 loans to depository institutions, including primary, secondary, seasonal, and term auction facility loans. Total cumulative daily loan value was nearly $7.4 trillion, compared with 437 loans valued at $2.3 trillion in 2008.

In the first half of 2009, the discount window made 610 loans valued at $6 trillion, followed by 685 loans valued at $1.3 trillion to end the year. In November 2009, the Federal Reserve Board, recognizing improvements in financial markets, reduced the maximum maturity of primary credit loans at the discount window for depository institutions to 28 days from 90 days, effective January 14, 2010, and subsequently returned the term to the traditional overnight lending as of March 18, 2010. The Term Auction Facility was suspended in March 2010 because conditions in the wholesale funding markets were improving.