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I has looking at this video on how interest rates are set. When the process of borrowing from the FED to commercial banks is explained, another entity is described(around 00:40).

So when the FED lends to commercial&investment banks, is there some other player involved in the transactions?

Why is this other player necessary?

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This video is not explaining how banks borrow from the Fed. It is explaining the role of banks as an intermediary between the Fed and the Home Loan Banks. Thus, the Home Loan Banks have cash and would like to deposit it at the Fed, but they can't because they are not eligible for the Fed deposit facility. So they deposit it with a bank, which turns around and deposits it in the Fed.

FYI Banks don't generally take out unsecured loans from the Fed, unless they are in crisis mode.

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I don't think, fed lends money to anyone. Government issues bonds and Fed buys these bonds.

As fed buys paper bonds from government, fed pays them in freshly printed dollars. Now government has the required number of dollars and goes on spending spree. when the government needs more cash, they issue more bonds, which are bought by Fed.

The case of bail outs are different. These are considered exception and under special privileges (If the failed company can bring down nations GDP by ~2% or more or if unemployment increases by 100K), then they bail out such huge corporations, which otherwise would cease to exist and impact the whole nation.

The numbers are for reference only. not sure of their internal considerations.

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  • $\begingroup$ FEDs do lend to other banks and entity during liquidity crisis. They can do repo to pump liquidity to banks, in exchange for securities for a short duration. They also do lend to other banks using discount rate, which is set at Fed Fund Rate when banks don't hit their reserve requirement ratio. During 2008 crisis, FED also does unconventional way to lend money to banks which known to many as Quantitative Easing. They buy up government bonds/bank CDs/big commercial entity bonds to pump liquidity and spur economic growth. All these are done via Money Market / Capital Market. $\endgroup$ – Sky Aug 2 '17 at 14:20
  • $\begingroup$ ummm... Fed Doesnt Lend. when Banks screw up, they raise funds by issuing bonds. Fed buys these bonds so the banks get money. This is called Bail Out. :D Fed facilitates lending among private banks. $\endgroup$ – kris123456 Sep 15 '17 at 23:04
  • $\begingroup$ when someone issue bonds, they're basically fund borrowers. The purchaser of bonds are fund lenders. Banks usually CD to borrow money from lenders. However FED do participate in repo (secured borrowing / lending with generally, T-bills instruments) activities too, it's another way to do short term lending to other huge institutions to create money supply, or liquidity in the monetary system. $\endgroup$ – Sky Sep 17 '17 at 8:33
  • $\begingroup$ Bailout is just to describe an action of excessive borrowing by a company, to continue their business operations; with a willing lender on the other end.The company might be facing meeting their short terms obligation (bankruptcy risk), however there's probability to turnaround with their business model over the long term. $\endgroup$ – Sky Sep 17 '17 at 8:37

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