What Is a Primary Dealer Credit Facility?

Primary Dealer Credit Facility - PDCF is an institution created by the Federal Reserve to provide overnight loans to primary dealers through their clearing banks in exchange for eligible collateral. The PDCF provides loans that settle the same business day and mature the following business day. The initial facility closed in 2010.

A new PDCF was announced by the Fed on March 17, 2020 offering loans with a term of up to 90 days. The new PDCF started on March 20, 2020 and will last until March 31, 2021, or "longer if conditions warrant."  

Key Takeaways

  • Primary dealers are banks or other financial institutions that can trade securities with the government.
  • The Primary Deal Credit Facility gives short-term loans to primary dealer institutions using securities the primary dealers own as collateral.
  • This ensures that primary dealers, a key part of the financial system, have sufficient liquidity.

Understanding the Primary Dealer Credit Facility (PDCF)

The Primary Dealer Credit Facility was established in order to encourage financial markets to function more effectively. Primary dealers borrow overnight loans from the PDCF through their clearing banks at the primary credit rate offered by the Federal Reserve Bank of New York.

A frequency-based fee is assigned to primary dealers who borrow from the PDCF on more than 45 business days.

Financial Crisis

The facility was one of a number of steps taken by the government to free up credit during the financial crisis. The 2008 financial crisis was the worst economic disaster since the Great Depression of 1929. The crisis was the result of a sequence of events, each with its own trigger and culminating in the near collapse of the banking system. It has been argued that the seeds of the crisis were sown as far back as the 1970s with the Community Development Act, which forced banks to loosen their credit requirements for lower-income minorities creating a market for subprime mortgages.

The Federal Reserve made loans totaling $8.95 trillion to primary dealers in exchange for a wide range of collateral under its Primary Dealer Credit Facility.  Citigroup, Merrill Lynch, and Morgan Stanley each received loans that total more than $1 trillion. However, these were overnight loans, which were frequently rolled over into new loans. Some 21,000 transactions with financial companies and foreign central banks were made using the facility.

Other steps taken during the crisis included the TALF and TARP programs. The Asset-Backed Securities Loan Facility (TALF) was created by the U.S. Federal Reserve in November, 2008 to boost consumer spending to help jumpstart the economy. This was accomplished through the issuance of asset-backed securities. The collateral for these securities was made up of auto loans, student loans, credit card loans, equipment loans, floorplan loans, insurance premium finance loans, loans guaranteed by the Small Business Administration, residential mortgage servicing advances or commercial mortgage loans. Backing for these loans came from funds provided by the New York Federal Reserve Bank.

The Troubled Asset Relief Program (TARP) was a group of programs created and run by the U.S. Treasury to stabilize the country’s financial system, restore economic growth, and mitigate foreclosures in the wake of the 2008 financial crisis. TARP sought to achieve these targets by purchasing troubled companies’ assets and equity.