Discount window

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Discount window represents an instrument of monetary policy (usually used by central bank) that allows eligible institutions to borrow money, usually on a short-term basis, to meet temporary shortages of liquidity caused by internal or external disruptions. The interest rate charged on such loans by central bank is called discount rate, and constitutes important factor in the control of money supply— which is a significant tool of monetary policy. When a bank is in need of money, it can turn to the Federal Reserve for a loan, the interest that the Fed charges the bank is called the discount rate. When banks other than the Federal Reserve loan other banks money, the interest rate charged is known as the Federal Funds Rate, and is typically approximately a percentage point below the Discount Rate.

The practice of setting the discount rate higher than the Federal Funds Rate is often referred to as a "Lombard Facility" or Lombard credit.

Note that in the United States, there are actually several different rates charged to institutions borrowing at the Discount Window: currently (1/7/06), the Primary Credit rate (the most common), the Seconday Credit rate (for banks that are less financially sound), and the Seasonal (sometimes also called the "Flex") Credit rate.