DEFINITION of 'Lending Facility'

A mechanism that central banks use when lending funds to primary dealers. Lending facilities provide financial institutions with access to funds in order to satisfy reserve requirements using the overnight lending market. Lending facilities are also used to increase liquidity over longer periods such as by using term auction facilities.

BREAKING DOWN 'Lending Facility'

Lending facilities were developed to enhance efficiency when depository institutions require capital. Central banks often accept a variety of assets as collateral from financial institutions in exchange for supplying the loan. These lending facilities can take the form of term auction facilities, term securities lending facilities, treasury automated auction processing systems (TAAPS) or the overnight lending market.

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