Bloomberg: The Federal Reserve said it will reduce the maximum maturity on discount-window loans to 28 days from 90 days as it moves to unwind some of the emergency measures introduced to fight the credit crisis.
The Fed Board cited “continued improvement in financial market conditions” in today’s announcement and said the change will take effect Jan. 14.
The term discount window had been extended in 2007 to specifically address term funding issues (funding beyond overnight) banks were experiencing as a result of the collapse in the ABCP market. As banks like Citi and RBS started taking CP conduit and SIV assets onto their balance sheet, their funding needs spiked and the Fed stepped in. The funding proved to be insufficient, as investment banks like Bear didn't have access to the discount window. For a reminder of the escalation of events in the summer of 2007, see this now famous Cramer freak-out:
We've come a long way since then as demonstrated by the LIBOR term structure. In particular the 3-month LIBOR drop is unprecedented, demonstrating availability of interbank term lending.
Term interbank funding is now functioning well enough for the Fed to reduce the discount window as well as other lending programs.
SoberLook.com
