To help healthy institutions meet credit demands in the months surrounding the century date change, the Federal Reserve Board on Tuesday said it would lend money at 150 basis points above the federal funds rate.
Loans will be available from Oct. 1 through April 7, the Fed said. That's one month earlier than the Fed proposed in May.
The Fed stuck with the proposed rate even though roughly 70% of the 93 comment letters filed suggested a lower rate.
"The lending rate should be high enough to encourage institutions to continue to make private-sector arrangements to meet potential funding needs," the Fed said.
Loans from this special discount window must be collateralized. But qualified borrowers will not be required to first seek funds elsewhere, the money may be used for any purpose, and the credit may remain outstanding through April 7.
Many banks expressed concern in comment letters that they could be ineligible to tap the Fed's special lending facility if their capital ratios temporarily fell below normal levels because of unusual movements of money around the year-2000 date change.
In response, the Fed said it would seek to determine if any changes in capital ratios are really just temporary. If so, it could still extend a loan.
The Fed said it expects that most of the special loans will go to smaller banks, which may face more liquidity pressures from a combination of factors, such as the possibility that some depositors with Y2K fears could move their money to larger banks or take out cash.
But the Fed does not know how much traffic the special discount window will see. "Because I can't tell how much of these pressures are going to come, I can't whether they're going to need it," a Fed official said.
