Lending Facility - Explained
What is a Lending Facility?
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Table of ContentsWhat is a Lending Facility?How Does a Lending Facility Work?Lending Facility and Term Auction FacilityHistory and Development of Lending Facilities
What is a Lending Facility?
The lending facility is a means in which financial assistance is being provided to banks and other financial institutions. These financial institutions must be U.S Federal reserve accredited. This is done to enable these financial institutions to meet up reserve requirements by Central bank. On the other hand, central banks may use lending facilities to maintain cash flow over a long period of time.
How Does a Lending Facility Work?
A lending facility performs a wide range of functions from supporting financial institutions with additional capital for development, satisfying a reserve requirement to supporting financial institutions to achieve their financial expectations. Lending facilities are an important resort in terms of needs for any financial institution. Banks would definitely need a lending facility because the Financial Services Regulatory Relief Act of 2006 states that banks must have a certain cash amount after all transactions. This requirement with the interest rate on reserves is stipulated in the act by the Federal Reserve's Board of Governors. With this legislation, banks strive to maintain a tangible amount of money as their reserve and when this reserve requirement is not achieved, a lending facility comes in. Reserve requirements are one of the three main tools of monetary policy, others include market operations and discount rates. These reserve requirements are set by the U.S. Federal Reserve (or Fed's) board of governors. Likewise, this bank reserve must usually be secured in a vault or a Federal Reserve Bank depending on the proximity of the bank to the Federal Reserve Bank, otherwise, in a vault.
Lending Facility and Term Auction Facility
In a press release by the Federal Reserve System Board of Governors in 2007, Term Auction Facilities existed for the primary purpose of eliminating issues in short-term funding markets. Term Auction Facilities refer to a means by the Federal Reserve to increase money flow in the financial market and also provide loans to financial institutions who deal in deposits such as banks, credit unions, savings and loan associations. TAF's are primarily created to provide solutions to any funds associated with problems in the short term funding markets.
History and Development of Lending Facilities
Lending facilities are solely created to provide capital to financial institutions. They are long-existing means aiding liquidity in the very moment of needs. They are structured in the form of term auction facilities: term securities lending facilities, treasury automated auction processing systems (TAAPS) or overnight lending markets. They have been in existence to be the solution to the collateral requirement of the central bank for loans.