The Discount Window and Discount Rate
The Discount Window
Federal Reserve lending to depository institutions (the "discount window") plays an important role in supporting the liquidity and stability of the banking system and the effective implementation of monetary policy. By providing ready access to funding, the discount window helps depository institutions manage their liquidity risks efficiently and avoid actions that have negative consequences for their customers, such as withdrawing credit during times of market stress. Thus, the discount window supports the smooth flow of credit to households and businesses.
On March 15, 2020, the Board announced changes to the discount window. These changes included the following:
- Narrowing the spread of the primary credit rate relative to the general level of overnight interest rates to help encourage more active use of the window by depository institutions to meet unexpected funding needs.
- Announcing that depository institutions may borrow from the discount window for periods as long as 90 days, prepayable and renewable by the borrower on a daily basis.
These changes are effective March 16, 2020, and will remain in effect until the Board announces otherwise. The press release announcing these changes can be found here.
The Discount Rate
The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility—the discount window. The Federal Reserve Banks offer three types of credit to depository institutions: primary credit, secondary credit, and seasonal credit, each with its own interest rate. All discount window loans are fully secured.
The discount rate on secondary credit is higher than the rate on primary credit. The rate for seasonal credit is an average of selected market rates. Rates are established by each Reserve Bank's board of directors, subject to the review and determination of the Board of Governors of the Federal Reserve System. The rates for the three lending programs are the same across all Reserve Banks.
Further information on the discount window, including interest rates, is available from the Federal Reserve System's discount window web site.