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Discount Window
Practical Law Glossary Item 3-503-4135 (Approx. 3 pages)
Glossary
Discount Window
The monetary policy instrument controlled by the Federal Reserve (Fed) that lends reserve funds, usually on a very short-term basis, to eligible depository institutions. The discount window:
- Acts as a safety valve in relieving pressures in reserve markets by extending short-term credit to depository institutions suffering liquidity strains.
- Ensures the basic stability of the entire payment system by supplying liquidity during times of economic stress.
The Fed’s discount window consists of:
- The primary credit program, which is the principal mechanism for providing a backup source of liquidity for generally sound depository institutions. It is available on a typically overnight basis, at a rate above the federal funds rate set by the Federal Open Market Committee. The higher rate ensures that the discount window will typically only be used as a backup, and not as a regular source of funding.
- The secondary credit program, which is available to depository institutions ineligible for primary credit. It is available on a typically overnight basis at a rate above the primary credit rate, and involves a higher level of oversight and administration by the relevant Federal Reserve Bank.
- The seasonal credit program, which is available to small depository institutions susceptible to significant seasonal swings in their loans and deposits (for example, if they are located in areas heavily dependent on agriculture or tourism). It is available on a longer-term basis on a floating rate based on market rates.
- The emergency credit program, which is available in emergency circumstances to individuals, partnerships, and corporations that are not depository institutions when, in the judgment of the relevant Federal Reserve Bank, credit is unavailable from other sources and failure to provide such credit would adversely affect the economy.
Except for the emergency credit program, only depository institutions that must maintain reserves under the Federal Reserve Board's (FRB) Regulation D (12 C.F.R. pt. 204) may establish borrowing privileges at the discount window. Other financial institutions that are not required to maintain reserves under Regulation D, such as banker’s banks and corporate credit unions, may obtain access to the discount window if they agree to voluntarily maintain reserves.
All extensions of credit through the discount window must be secured by collateral that is deemed sufficient and acceptable to the relevant Federal Reserve Bank.
The statutory basis for the discount window is primarily found in the Federal Reserve Act (12 U.S.C. ch. 3) and the implementing regulations are found in the FRB’s Regulation A (12 C.F.R. pt. 201).