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Investing.com -- Federal Reserve Vice Chair Philip Jefferson addressed the 2025 Financial Markets Conference, sponsored by the Federal Reserve Bank of Atlanta, on the topic of "Liquidity Facilities: Purposes and Functions". The conference was centered around developments in financial intermediation and their potential implications for monetary policy.
Jefferson shed light on the role of central banks in providing liquidity, a fundamental element of financial intermediation. He emphasized that the main forms of liquidity offered by central banks, such as currency and bank reserves, are the backbone of the economy’s safe liquidity. The Vice Chair also highlighted the need for central banks to be prepared to provide liquidity in times of financial stress and to take steps to minimize moral hazard.
In his speech, Jefferson focused on two types of liquidity provision that aim to reduce frictions associated with the basic operations of banks: intraday credit and overnight credit. He also drew attention to the design features of similar liquidity facilities in the U.K., Japan, and the euro area, noting the importance of learning from other central banks’ experiences.
Jefferson explained how liquidity provisions operate in the U.S. Banks maintain deposit accounts at the Federal Reserve (Fed), and these reserves are used to meet payment flows. To manage mismatches in the timing of payment inflows and outflows, the Fed extends intraday credit, also known as daylight overdrafts. These intraday credit facilities provide temporary credit to depository institutions such as commercial banks and credit unions to support the smooth functioning of the payment system.
The Fed also provides overnight credit through the discount window to approved counterparties against a broad range of collateral to mitigate short-term misallocations of liquidity. All discount window loans are collateralized, and a wide range of bank assets, including a variety of loans and securities, are eligible to serve as collateral. The Fed operates three separate facilities under the discount window: primary credit, secondary credit, and seasonal credit.
Jefferson also compared the design features of some foreign central bank liquidity facilities that are similar to the Fed’s discount window. He noted that the Bank of England (BOE) operates two such short-term facilities: an operational standing facility and a discount window. The Bank of Japan (BOJ) has two facilities: one that provides overnight loans and another that provides somewhat longer-term funding up to three months. The European Central Bank (ECB) operates a marginal lending facility quite similar to the Fed’s discount window.
In conclusion, Jefferson highlighted the Fed’s ongoing efforts to improve the operational aspects of the discount window and intraday credit. He pointed to several advancements, including the launch of a convenient online portal called "Discount Window Direct" for requesting and prepaying discount window loans. The Fed also issued a public request for information (RFI) last year seeking to identify operational frictions in these facilities, and those comments are currently under review.
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