Secondary CreditEdit
Secondary Credit is a facility within the Federal Reserve System designed to provide liquidity to depository institutions that do not meet the criteria for primary access, but nonetheless need temporary funding to withstand short-term liquidity squeezes. It operates as part of the broader discount window framework, alongside primary credit and seasonal credit, with the aim of preserving financial stability and preventing a disorderly contraction of lending to households and businesses. By design, it places a higher price on liquidity and imposes stricter terms than primary credit, balancing the need for access with the goal of limiting moral hazard. Federal Reserve Discount window Primary Credit Seasonal Credit Lender of last resort Moral hazard
Secondary Credit is grounded in a longstanding view that a central bank should act as a lender of last resort to stabilizing markets when private liquidity dries up but sound institutions still require confidence to continue operating. The concept and its related facilities emerged as the system evolved to meet evolving financial conditions, with the Fed using the discount window as a backstop during periods of stress while maintaining a leash on risk through rate differentials and collateral requirements. The framework sits within the Fed’s broader mandate to aim for monetary stability and smooth functioning of the banking system, not as a substitute for sound risk management in private banks. Federal Reserve Lender of last resort Macroprudential policy
History and framework
Origins and evolution
Central banks have long offered emergency lending to banks to prevent runs and to preserve credit flows. The Federal Reserve formalized a discount window, including primary and secondary credit facilities, to provide short-term liquidity to depository institutions in need. The system is designed to ensure that liquidity is available when markets seize up, while keeping government exposure and taxpayer risk in check through credit terms that reflect the risk taken by the borrower. The arrangement is anchored in the principle that temporary liquidity support should be disciplined, targeted, and reversible. Lender of last resort Discount window Federal Reserve
Crisis-era expansion and reforms
During the 2007–2009 financial crisis, the Fed expanded liquidity facilities and used the discount window more intensively to prevent the failure of solvent institutions experiencing liquidity stress. In that period, the Fed also deployed a constellation of special facilities beyond the traditional discount window to stabilize markets, including programs that extended beyond ordinary bank operations. These actions are widely debated: supporters say they were essential to preventing a broader collapse and credit freeze; critics point to concerns about moral hazard and the perception that government-backed liquidity can shield poor risk management from consequences. The conversation around these tools continues to inform discussions of their design, governance, and sunset provisions. Financial crisis of 2007–2008 TALF Discount window Primary Credit Seasonal Credit
Mechanics and eligibility
Who can access: Secondary Credit is available to depository institutions that do not meet the conditions for primary credit but are considered viable in the near term and able to address liquidity needs with appropriate safeguards. Access is contingent on supervisory approval and the institution’s ability to post acceptable collateral. Federal Reserve Discount window
Price and terms: The rate for Secondary Credit sits above the primary credit rate, creating a premium for the risk and convenience of the liquidity backstop. Terms are intentionally stricter to deter reliance on central-bank funds for ordinary funding needs and to preserve market discipline. Primary Credit Moral hazard
Collateral and oversight: Loans under Secondary Credit require collateral, with the Fed applying its standard collateral framework and ongoing supervisory oversight to minimize risk to the system and to taxpayers. Collateral Federal Reserve Bank supervision
Maturity and scope: The facility emphasizes short-term, liquidity-oriented lending, aligned with the institution’s immediate needs and the ability to address underlying issues. The arrangement is designed to be temporary, with a focus on stabilizing funding conditions rather than substituting for normal capital markets. Lender of last resort Economic stability
Controversies and debates
Moral hazard and market discipline: Critics on the political left and elsewhere argue that backstops can shield weak management and reduce private incentives to prepare for liquidity stress. Proponents counter that the safeguards—premium pricing, collateral, and supervisory conditions—help preserve discipline while preventing runs and wider damage to the economy. From this vantage, the correct calibration of liquidity facilities is about preventing a crash, not subsidizing failure. Moral hazard Economic stability
Taxpayer costs and inflation risk: Opponents warn that prolonged or large-scale use of central-bank liquidity facilities can have inflationary or fiscal spillovers if not carefully managed. Advocates emphasize that, when used prudently and temporarily, the costs to taxpayers are limited and the benefits of avoiding systemic contraction outweigh the risks. The debate continues about the appropriate scale, duration, and conditions of such interventions. Federal Reserve Macroprudential policy
Transparency and governance: Critics sometimes call for greater transparency around access, terms, and outcomes of secondary credit lending. Supporters argue that the backstop should be precise and targeted to maintain financial stability while avoiding political micromanagement of day-to-day lending decisions. The balance between openness and effectiveness is an ongoing policy question. Transparency Governance
Alternatives and reforms: Some observers push for reforms that emphasize stronger private-sector liquidity facilities, more stringent capital requirements, and tighter eligibility criteria. Others argue for a modernized central-bank toolkit that clearly delineates monetary policy from lender-of-last-resort functions, preserving the integrity of both. Capital requirements Private sector liquidity Monetary policy