Seasonal Borrowing

  • Federal Reserve Banks offer seasonal credit to help qualifying institutions overcome seasonal shortages of reserves.
  • The seasonal credit program is used mainly by banks in agricultural communities.
  • Reserve Banks extend seasonal credit at a market-related interest rate that is based on the federal funds rate and the 90-day certificate of deposit rate.

Federal Reserve Banks began extending seasonal credit in 1973 to help small depository institutions overcome strains placed on their reserves by seasonal pressures. Seasonal credit is one of three types of credit available at the Federal Reserve's discount window. The other two types are primary credit and secondary credit.

Reserve Banks extend primary credit on a short-term basis (typically overnight) to depository institutions with strong financial positions and ample capital, at a rate above the target federal funds rate. Secondary credit is extended to institutions that do not qualify for primary credit, at a rate higher than the primary credit rate. As with primary credit, secondary credit is available as a backup source of liquidity on a short-term basis, provided that the loan is consistent with a timely return to a reliance on market sources of funds.

Major Users of Seasonal Credit
Small depository institutions in agricultural communities are the primary users of seasonal credit. Resort-area banks are another, though less significant, user of seasonal credit.

Seasonal borrowing reflects a pattern tied to agricultural cycles. In the spring and summer, when crops are planted and cultivated, loan demand rises and deposits decline, as many farmers generate little income. As a result, banks serving farm communities can experience temporary shortages of reserves. When crops are harvested and sold in the fall and winter, farmers repay their loans, deposits increase, and bank reserves rise. Depository institutions then pay back their seasonal borrowings to their regional Reserve Bank. Seasonal credit outstanding typically averages a low between $15 and $20 million a month from January - March, and a high of $175-$185 million in August.

Most seasonal borrowing occurs in the Midwest. In some Federal Reserve districts, such as the New York district, banks typically have little, or no, demand for seasonal credit.

While banks of all sizes experience seasonal lending variability, the Fed's seasonal credit program is available mainly to depository institutions whose total deposits are under $500 million. Larger depository institutions, which have greater access to credit-market funds, typically meet their needs in the federal funds market. Most small institutions get the bulk of their credit from special thrift industry institutions, such as the Federal Home Loan Banks for member savings and loan associations and savings banks, and the National Credit Union Administration's Central Liquidity Facility for member credit unions.

Depository institutions apply for a seasonal credit line at the Federal Reserve by demonstrating sharp seasonal swings in deposits and loan demand over the previous three years. If the Reserve Bank decides that the seasonal pressures are prevalent and have lasted for a minimum of four weeks, it may extend seasonal advances for up to nine months.

The Lending Rate
From 1973 to 1991, the Federal Reserve provided seasonal credit at the discount rate, which usually was lower than the federal funds rate. In January 1992, the Fed adopted a market-related rate that is calculated by averaging the 14-day average of the effective federal funds rate over the prior reserve maintenance period and the 10-day average of the secondary market rate for negotiable 90-day certificates of deposit, also over the previous maintenance period.

February 2003

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