Discount window

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The discount window is an instrument of monetary policy (usually controlled by central banks) that allows eligible institutions to borrow money from the central bank, 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 a central bank is called the discount rate, base rate, repo rate, or primary rate. It is distinct from the federal funds rate or its equivalents in other currencies, which determine the rate at which banks lend money to each other. In recent years the discount rate has been approximately a percentage point above the federal funds rate (see Lombard credit). Because of this, it is a relatively unimportant factor in the control of the money supply, and is only taken advantage of at large volume during emergencies.

1 In the United States
- 1.1 Alterations during 2007-8 'credit crunch'
- 1.2 Usage after September 11, 2001
2 See also
3 External links
4 References

[edit] In the United States

In the United States, there are actually several different rates charged to institutions borrowing at the Discount Window. In 2006 these were: the primary credit rate (the most common), the secondary credit rate (for banks that are less financially sound), and the seasonal credit rate. Primary and secondary credit is normally offered on a secured overnight basis, while seasonal credit is extended up to nine months. The primary credit is normally set 100 basis points (or bp) above the federal funds target and the secondary credit rate is set 50 bp above the primary rate. The seasonal credit rate is set from an averaging of the effective fed funds rate and 90-day certificate of deposit rates.

[edit] Alterations during 2007-8 'credit crunch'

On September 18, 2007, the Board of Governors of the Federal Reserve announced ^[1] a temporary change to primary credit lending terms. The discount rate was cut by 50 bp — to 5.25% from 5.75% — and the term of loans was extended from overnight to up to thirty days. (The federal funds rate was cut by 50 bp to 4.75% ^[2])

On March 16, 2008 concurrent with measures to rescue Bear Stearns from insolvency and to stem further institutional bank runs, the Federal Reserve announced ^[3] significant and temporary changes to primary credit lending terms. The term of loans was extended from up to thirty days, to up to ninety days. In contrast, less than a year before, the term was only overnight. It also allowed collateralization of such loans by a broad range of investment-grade debt securities, and extended use of the discount window to a group of non-banks, the primary dealers. The extension of the Fed’s discount window as lender of last resort support to non bank primary dealers was last implemented during the Great Depression. ^[4]

Recent changes to rates
Date	Discount rate (change)	Fed funds rate (change)
September 18, 2007	5.25% (-50bp)	4.75% (-50bp)
October 31, 2007	5.00% (-25bp)	4.50% (-25bp)
December 11, 2007	4.75% (-25bp)	4.25% (-25bp)
January 22, 2008	4.00% (-75bp)	3.50% (-75bp)
January 30, 2008	3.50% (-50bp)	3.00% (-50bp)
March 16, 2008	3.25% (-25bp)	3.00% (—)
March 18, 2008	2.50% (-75bp)	2.25% (-75bp)
April 30, 2008	2.25% (-25bp)	2.00% (-25bp)

[edit] Usage after September 11, 2001

After the September 11, 2001 attacks, as the volume of borrowing requests increased dramatically, lending to banks through the discount window totaled about $46 billion, more than two hundred times the daily average for the previous month.^{[citation needed]} The flood of funds released into the banking system reduced the immediate need for banks to rely on payments from other banks to make the payments they themselves owed others. This kept liquidity alive in the economy despite interruptions of communications and cash flow between banks.