Williams explains lending facility rate relative to target spread determines precautionary reserve needs and facility usage.
“This effect is greatest when the lending rate is closer to the target spread. On the other hand, if the lending rate is very high relative to the target spread, then the facility is rarely used, and the optimal supply of reserves is near what it would be absent a facility.”
Williams explains lending facilities cap the spread, mitigating the precautionary motive for holding reserves.
“With a lending facility, the choice of the optimal supply of reserves takes into account the fact that the spread is capped at the lending rate.”