Discount window

The discount window is one of the oldest tools of central banking, dating to the Federal Reserve's founding under the Federal Reserve Act of 1913. It allows depository institutions to borrow directly from a central bank, typically on a very short-term basis and secured by collateral such as Treasuries, agency securities, or eligible loans. The name derives from the historical practice of banks bringing commercial paper to be "discounted" — that is, purchased at less than face value — by the central bank.

At the U.S. Federal Reserve, the window is organized into tiers. Primary credit is extended to sound, well-capitalized banks at the primary credit rate (often called the discount rate), set by the Boards of Directors of the regional Reserve Banks and approved by the Board of Governors. Secondary credit is available at a higher rate to institutions not eligible for primary credit, with closer supervisory oversight. Seasonal credit serves smaller banks with predictable cyclical funding needs, such as agricultural lenders.

The window serves two functions central to financial stability: routine liquidity management and emergency lender-of-last-resort support, a role articulated by Walter Bagehot in Lombard Street (1873), who urged central banks to lend freely against good collateral at a penalty rate during panics. Use of the window historically carried stigma — borrowing was seen as a signal of weakness — which the Fed tried to address in 2003 by reorganizing the facility and pricing primary credit above the federal funds target.

During acute stress, central banks expand window-like facilities. Examples include the Fed's Term Auction Facility (2007–2010), the Primary Dealer Credit Facility (2008), and the Bank Term Funding Program created in March 2023 after the failure of Silicon Valley Bank. Other central banks operate analogous facilities: the ECB's marginal lending facility, the Bank of England's Discount Window Facility, and similar windows at the Bank of Japan and the People's Bank of China.