Fed sets 0% reserve requirement ratio, urges banks to use capital, liquidity buffers to bolster lending in face of coronavirus

Reserve requirement ratios will drop to 0% effective March 26, the Federal Reserve said Sunday, as it announced a series of actions to encourage financial institutions to step up the availability of credit in the face of global economic downturn spawned by the spread of the coronavirus and other issues.

The Fed also said that, in addition to zeroing out the reserve requirement ratio, it was: lowering the discount window’s primary credit rate by 150 basis points to 0.25%, effective March 16 (and announcing that depository institutions may borrow from the discount window for periods as long as 90 days); encouraging banks to use their capital and liquidity buffers as they lend to households and businesses who are affected by the coronavirus; and urging depository institutions to use intraday credit extended by Federal Reserve Banks, on both a collateralized and uncollateralized basis.

“The Federal Reserve is carefully monitoring credit markets and is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals,” the Fed said in a rare statement issued on a Sunday.

In reducing the reserve requirement to 0% effective March 26, the Fed noted that date is the beginning of the next reserve maintenance period. “This action eliminates reserve requirements for thousands of depository institutions and will help to support lending to households and businesses,” the Fed said.

Lowering the discount window’s primary credit rate to 0.25%, the central bank said, reflects both the 100 bp reduction in the target range for the federal funds rate and a 50 bp narrowing in the primary credit rate relative to the top of the target range.

“Narrowing the spread of the primary credit rate relative to the general level of overnight interest rates should help encourage more active use of the window by depository institutions to meet unexpected funding needs,” the Fed said.

The Fed also said that depository institutions could borrow from the discount window for periods as long as 90 days, which is prepayable and renewable by the borrower on a daily basis. The same broad range of collateral for discount window loans would be accepted, the agency said.

On capital and liquidity buffers, the Fed pointed out that they are designed “to support the economy in adverse situations and allow banks to continue to serve households and businesses.” The Fed said that it supports firms that choose to use their capital and liquidity buffers to lend and undertake other supportive actions in a safe and sound manner.

Finally, the Fed said that availability of intraday credit would “support the provision of liquidity to households and businesses and the general smooth functioning of payment systems.”

Federal Reserve Actions to Support the Flow of Credit to Households and Businesses

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