By Elizabeth Hemmerdinger

My friend Viv, who helped me get started on this stuff last week, has come through with a more advanced set of definitions. Some are commonplace-sounding terms newly adopted by Wall Street whiz kids to name their new tools — others have been around forever.

  • LIBOR.  The London Inter Bank Offered Rate is the interest rate at which banks are willing to lend funds to other banks in the London interbank market.  LIBOR rates are often used as a reference rate for financial instruments.
  • Fed Funds Rate. The Fed Funds rate is the interest rate at which banks lend other banks money.  Banks are required, by law, either with the fed (in non interest bearing accounts) or in vault cash.  If a bank falls below the reserve requirement, it can borrow from another bank’s balance at the Federal Reserve.  The average interest rate that the borrowing banks must pay is the Fed Funds rate. 

Discount Window. The Discount Window allows eligible depository institutions to borrow money from the central bank to meet temporary shortages in exchange for “eligible collateral”.  The interest rate is set approximately one point above the Fed Funds rate.  The Federal Reserve may lower the discount rate or make temporary changes to make it more attractive for financial institutions to borrow during times of financial distress.  Because it has traditionally been seen as the lender of last resort, banks have stayed away from the discount window because of the negative stigma.

  • Term Auction Facility.  The TAF was instituted by the Federal Reserve in December 2007 because banks seemed unwilling to lend to one another.  The TAF, a temporary program and allows banks to borrow below the discount rate. The Fed auctions collateralized (the Fed has allowed a wide variety of collateral including some mortgage backed securities) loans with terms of 28 and 84 days to depository institutions that are in “generally sound” financial condition.  Interest rates and amounts are set by auctions. 
  •  Term Securities Lending Facility. The TSLF, which began in March 2008, allows primary dealers (banks and investment banks) to borrow Treasuries, secured for a term of 28 days against approved collateral.  The TSLF was intended to allow primary dealers to switch debt that is less liquid for US government securities that are easily tradable.
  •  Ted Spread. The Ted Spread is the gap between three month LIBOR and the Treasury Bill rate.  It is a good indicator of perceived credit risk in the market. As the Ted Spread widens, it suggests that lenders feel an increased risk of default on interbank loans or counterparty risk.

"Many of these things are new," Viv wrote me yesterday, "things the fed has tried to increase liquidity in the market.  The discount window has been around forever,  but it was opened to investment banks after the collapse of Bear Stearns.I’m not sure if it’s still open, and I don’t think it was widely used. "

Those financial pages feel clearer already. 

(Editor's note: A perhaps good companion to this lesson is Salon's "What to Do With my Money Now," a conversation between Broadsheet's Sarah Hepola and Ilyce Glick, author of 100 Questions Every First-Time Home Buyer Should Ask. – CML)


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