Adjustment Credit

Ever since the Great Recession of 2007, there exist stringent requirements on how much in reserves commercial banks need to keep in order having enough cash on hand so customers won’t worry their savings will suddenly disappear. So, just like we might borrow from a bank when our own “reserves” are low, commercial banks hit up the Federal Reserve Bank for loans.

Called adjustment credits, these short-term loans happen more often when interest rates are high, making the money supply lower, since payouts for interest on savings accounts will increase. To get the adjustment credit, a commercial bank issues a promissory note to a Federal Reserve Bank. The note spells out the amount of principal, the interest rate and the maturity date for when it must be paid back. If the bank doesn’t pay it back on time, or doesn’t maintain a certain amount in reserves, the Fed will send in numerous auditors, and could shut the place down.