Depository Institution Services
The Cleveland Fed extends credit to financial institutions, and must manage the way it does so.
One way it does this is via the Discount Window through which the Cleveland Fed lends. Why the name? When banks borrow from the Federal Reserve, they must pledge collateral they have on their books, such as Treasury securities and loans. To protect the Federal Reserve from losses, our Bank trims, or discounts, the assigned value of those pledged securities before it will lend to a bank. Hence the term, Discount Window.
Basically, these are loans to financial institutions. Banks tend to borrow from the Fed when our loans are cheaper than those offered elsewhere.
The credit extended to financial institutions isn’t limited to the Discount Window funds. The Cleveland Fed also extends credit to banks to enable the payments system to work.
Managing the Bank’s credit risk also involves watching the Fourth Federal Reserve District’s institutions’ account activity (remember, as a bankers’ bank, banks have accounts with the Cleveland Fed) and monitoring for overdrafts, among other things.
Additionally, the Cleveland Fed watches the depository institutions themselves, monitoring their financial health.