Fed funds transactions can be initiated by either a funds lender or a funds borrower. An institution seeking to lend fed funds identifies a borrower directly, through an existing banking relationship, or indirectly, through a fed funds broker. The most commonly used method to transfer funds between depository institutions is for the lending institution to authorize its district Federal Reserve Bank to debit its reserve account and to credit the reserve account of the borrowing institution.

The most common type of fed funds transaction is a very short-run loan between two financial institutions; some transactions, however, have longer-term maturities. Most overnight loans are booked without a contract. The borrowing and lending institutions exchange verbal agreements based on various considerations, particularly their experience in doing business together, and limit the size of transactions to established credit lines in order to minimize the lender’s exposure to default risk. Such arrangements facilitate speedy processing at the lowest possible transaction cost.

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