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
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.
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