Comments on: Liquidity, Fed Action, and all that Stuff http://theessentialsoftrading.com/Blog/index.php/2007/08/14/liquidity-fed-action-and-all-that-stuff/ Information and resources for those looking to learn about trading and the markets Sat, 04 Feb 2012 14:17:59 +0000 hourly 1 http://wordpress.org/?v=3.2.1 By: John http://theessentialsoftrading.com/Blog/index.php/2007/08/14/liquidity-fed-action-and-all-that-stuff/#comment-9180 John Wed, 22 Aug 2007 13:17:56 +0000 http://www.theessentialsoftrading.com/Blog/index.php/2007/08/14/liquidity-fed-action-and-all-that-stuff/#comment-9180 I don't think the figures have come out yet as to how much activity has gone through the Discount window since the rate cut. I believe I read earlier today that the figures would be released tomorrow, but I'm not positive. As for why a bank would use the Discount window, there's only one - they can't get borrow the reserves they need from another bank. That means either those reserves are not available (no market liquidity) or the potential lending banks do not want the borrowing bank as a counter-party or have reached their lending limits to that bank. The Fed Funds market is unsecured lending/borrowing. I don’t think the figures have come out yet as to how much activity has gone through the Discount window since the rate cut. I believe I read earlier today that the figures would be released tomorrow, but I’m not positive.

As for why a bank would use the Discount window, there’s only one – they can’t get borrow the reserves they need from another bank. That means either those reserves are not available (no market liquidity) or the potential lending banks do not want the borrowing bank as a counter-party or have reached their lending limits to that bank. The Fed Funds market is unsecured lending/borrowing.

]]> By: Olle http://theessentialsoftrading.com/Blog/index.php/2007/08/14/liquidity-fed-action-and-all-that-stuff/#comment-9178 Olle Wed, 22 Aug 2007 12:47:10 +0000 http://www.theessentialsoftrading.com/Blog/index.php/2007/08/14/liquidity-fed-action-and-all-that-stuff/#comment-9178 So under which circumstances would you see banks need to go to the discount window? Has someone used it since they cut it by 50bp? So under which circumstances would you see banks need to go to the discount window? Has someone used it since they cut it by 50bp?

]]> By: John http://theessentialsoftrading.com/Blog/index.php/2007/08/14/liquidity-fed-action-and-all-that-stuff/#comment-9172 John Tue, 21 Aug 2007 23:49:14 +0000 http://www.theessentialsoftrading.com/Blog/index.php/2007/08/14/liquidity-fed-action-and-all-that-stuff/#comment-9172 Under normal circumstances, banks will use the Fed Funds market to acquire the reserves they need from another bank. The discount window is a kind of last resort that very rarely gets used, not only because the rate is higher, but also because it's seen as a bit embarassing to the bank forced in to that situation. In the current market environment, though, the fear factor has a number of banks who would otherwise normally be active in the Fed Funds market as lenders staying away. That has made it difficult for those who need the funds to get them, which is why the Fed and other central banks have been active adding liquidity. Under normal circumstances, banks will use the Fed Funds market to acquire the reserves they need from another bank. The discount window is a kind of last resort that very rarely gets used, not only because the rate is higher, but also because it’s seen as a bit embarassing to the bank forced in to that situation.

In the current market environment, though, the fear factor has a number of banks who would otherwise normally be active in the Fed Funds market as lenders staying away. That has made it difficult for those who need the funds to get them, which is why the Fed and other central banks have been active adding liquidity.

]]> By: Olle http://theessentialsoftrading.com/Blog/index.php/2007/08/14/liquidity-fed-action-and-all-that-stuff/#comment-9169 Olle Tue, 21 Aug 2007 20:40:29 +0000 http://www.theessentialsoftrading.com/Blog/index.php/2007/08/14/liquidity-fed-action-and-all-that-stuff/#comment-9169 Thank you for a good website, I just descoverd it! My question is regarding why banks would have to borrow at the discount rate instead of the fed funds rate. As I have read banks go to the discount window when the cant borrow at the fed funds rate. But every time fed funds goes over feds target fed act in the repomarket, bringing down fed funds rate. So banks, as I understand it, always can borrow at feds funds rate and the therefore never have to use the discount window. Please help me because there has be something important I miss. Best regards, Olle Bastmark Stockholm, Sweden Thank you for a good website, I just descoverd it! My question is regarding why banks would have to borrow at the discount rate instead of the fed funds rate. As I have read banks go to the discount window when the cant borrow at the fed funds rate. But every time fed funds goes over feds target fed act in the repomarket, bringing down fed funds rate. So banks, as I understand it, always can borrow at feds funds rate and the therefore never have to use the discount window. Please help me because there has be something important I miss.

Best regards,
Olle Bastmark
Stockholm, Sweden

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