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Discount window

The discount window is a collateralized lending facility operated by the twelve Federal Reserve Banks that enables eligible depository institutions, including U.S. branches of foreign banks, to obtain short-term funds, typically overnight, at the discount rate to address temporary liquidity shortages or reserve deficiencies.^[1] This mechanism functions as a safety valve to relieve reserve market pressures and support overall banking system stability by providing access to central bank reserves when private funding markets are disrupted.^[2] All advances require collateral acceptable to the lending Reserve Bank, such as U.S. Treasury securities or high-quality loans, ensuring the facility's security while aligning with sound banking practices.^[3] Established in 1913 upon the founding of the Federal Reserve System, the discount window initially served as the core instrument for implementing monetary policy through direct credit extension to banks, reflecting the era's emphasis on decentralized reserve management.^[4] Over the 20th century, its prominence diminished as open market operations emerged as the primary policy tool, repositioning the discount window toward a lender-of-last-resort role focused on crisis liquidity provision rather than routine policy execution.^[5] The facility now encompasses three distinct credit programs—primary credit for sound institutions at a rate above the federal funds target, secondary credit for institutions not qualifying for primary at a higher penalty rate, and seasonal credit for smaller banks with recurring funding patterns—to tailor lending to varying institution needs while discouraging non-emergency reliance.^[1] A persistent challenge is the stigma associated with discount window borrowing, which stems from market perceptions of it as an indicator of institutional weakness, often resulting in underutilization even amid liquidity stress and contributing to amplified banking strains during downturns.^[6] This reluctance has prompted periodic reforms, including adjustments during the 2007–2008 financial crisis to broaden eligibility and reduce penalties, thereby enhancing the facility's effectiveness in preventing broader systemic contagion without moral hazard.^[3] Empirical evidence from crisis episodes underscores the discount window's causal role in stabilizing reserves and averting fire-sale asset disposals, though ongoing debates center on further destigmatization measures to optimize its countercyclical function.^[7]

Definition and Core Mechanics

Fundamental Purpose and Operations

The discount window functions as a central bank's short-term lending facility to eligible depository institutions confronting temporary liquidity shortfalls, serving as a lender of last resort to bolster banking system stability.^[3]^[8] This mechanism enables institutions to obtain funds by pledging collateral, thereby addressing immediate reserve deficiencies without immediate liquidation of assets at distressed prices.^[4]^[9] In operation, borrowing institutions submit collateral—typically high-quality securities such as U.S. Treasury obligations or agency debt—that meets the central bank's standards, receiving advances often structured as overnight loans to align with routine liquidity management.^[1]^[2] This collateralized framework ensures the central bank incurs minimal credit risk while providing a backstop that supports compliance with reserve requirements and sustains credit intermediation to the broader economy.^[10]^[11] Eligibility is confined to depository institutions, such as commercial banks and credit unions, that maintain accounts at the central bank, fostering disciplined liquidity practices by limiting access to those integrated into the reserve system.^[7]^[12] Through this process, the discount window acts as a safety valve in reserve markets, mitigating strains that could otherwise propagate disruptions across financial intermediaries.^[2]^[13]

Interest Rates, Terms, and Collateral Requirements

The primary credit rate applies to financially sound depository institutions and is established by each Federal Reserve Bank's board of directors at least every 14 days, subject to review by the Federal Reserve Board, typically set at or above the upper bound of the Federal Open Market Committee's (FOMC) target range for the federal funds rate to function as a penalty discouraging routine borrowing over market alternatives.^[1]^[14] As of September 18, 2025, the primary credit rate stands at 4.25 percent across all districts, aligning with the FOMC's federal funds target range of 4.00 to 4.25 percent, while the secondary credit rate for less sound institutions remains 50 basis points higher at 4.75 percent.^[15]^[14] Loan terms under the discount window are generally overnight for both primary and secondary credit to reinforce its role as short-term liquidity support, though primary credit advances may extend up to 90 days at the Reserve Bank's discretion, with borrowers able to prepay or renew daily.^[16]^[17] Secondary credit, intended for backup needs of institutions ineligible for primary credit, is restricted to very short maturities, often overnight, and entails stricter oversight to mitigate risk exposure.^[14] Repayment occurs on the maturity date or upon demand, ensuring the facility does not substitute for permanent funding sources.^[16] Collateral requirements mandate that all discount window loans be fully secured by eligible assets pledged to the lending Reserve Bank, including a broad array of securities such as U.S. Treasury obligations, agency debt, and certain municipal bonds, as well as loans like residential mortgages, valued at fair market estimates adjusted by protective margins to account for potential price volatility and ensure the Federal Reserve incurs no credit loss.^[18]^[19] These margins are detailed in Reserve Bank schedules, with updates implemented on November 1, 2023, and July 1, 2025, to reflect current market conditions and asset risks, prioritizing verifiable overcollateralization to minimize central bank exposure.^[19]^[20] Unlike open market operations, which indirectly inject liquidity system-wide through securities purchases without bank-specific collateral, the discount window provides direct, collateralized loans to individual institutions, thereby isolating liquidity provision to verified solvency and serving as a targeted backstop rather than a primary monetary policy instrument.^[3]^[4] This structure, with penalty pricing and stringent collateral, incentivizes banks to seek private market funding first, preserving the facility's emergency function while limiting moral hazard.^[1]^[21]

Historical Origins and Evolution

Establishment in the Federal Reserve Act of 1913

The Federal Reserve Act of 1913 established the discount window as a core mechanism to address liquidity shortages exposed by recurrent banking panics, particularly the Panic of 1907, which highlighted the absence of a centralized elastic currency supply in the fragmented U.S. banking system.^[22] Prior to the Fed's creation, private interventions like J.P. Morgan's coordination of clearing house certificates provided temporary liquidity but underscored the need for a systemic lender of last resort.^[22] Section 13 of the Act empowered Federal Reserve Banks to discount notes, drafts, and bills of exchange arising from commercial transactions, enabling member banks to obtain short-term advances collateralized by eligible paper.^[23] This facility aimed to convert illiquid assets into cash rapidly, fostering monetary elasticity without relying on inflexible gold or note issuance constraints.^[24] The term "discount window" derives from the physical teller windows at Federal Reserve Banks where bank representatives historically presented eligible paper for rediscounting, a practice that symbolized direct access to central bank liquidity.^[7] Although operations later shifted to electronic systems, the metaphor persisted to denote this privileged borrowing channel, initially restricted to Federal Reserve member banks.^[25] The mechanism's design emphasized short-term lending to mitigate seasonal or episodic strains, aligning with the Act's goal of preventing panic-induced contractions by supplying reserves on demand.^[26] Historical records indicate early discount window usage surged during periods of heightened liquidity demand, such as agricultural harvest seasons, when rural banks faced deposit outflows and required advances to maintain operations.^[26] These spikes validated the facility's role in providing counter-cyclical liquidity, with Federal Reserve Banks discounting commercial paper to expand the money supply precisely when economic activity demanded it, thereby stabilizing the banking system in its formative years.^[24]

Key Reforms from the 1960s to Pre-2000

In the late 1960s, the Federal Reserve began setting the discount rate below the target federal funds rate, which subsidized borrowing and encouraged banks to rely on the discount window rather than interbank markets, resulting in overuse for non-emergency purposes.^[27] To address this misalignment, the Fed introduced administrative controls, including moral suasion and heightened supervisory scrutiny, effectively creating early stigma to ration access and promote market-based funding.^[6] These non-price penalties aligned incentives by discouraging routine borrowing, though they reduced the facility's responsiveness during liquidity stresses.^[27] A 1971 system-wide reappraisal of the discount mechanism led to formalized adjustments in the early 1970s, emphasizing open market operations over discount lending and refining eligibility criteria to limit continuous use.^[28] By 1973, the window's offerings were structured into three distinct programs—adjustment credit for short-term needs, seasonal credit for predictable fluctuations, and extended credit for structural liquidity issues—to better match borrowing purposes while maintaining penalty elements through approval processes.^[25] This categorization aimed to enhance precision in liquidity provision but reinforced stigma by associating frequent access with supervisory review.^[26] In the 1980s, amid persistent spreads between discount and market rates, the Fed imposed surcharges on frequent or extended borrowings, particularly for large banks, charging the basic rate for the first 60 days followed by higher penalties.^[29] Regulations updated in 1980 required institutions to exhaust alternative funding sources before borrowing, further embedding penalty pricing via administrative hurdles rather than explicit rate markups.^[25] These reforms curtailed peacetime usage, with discount advances averaging low levels outside crises, as banks avoided the perceived risks of signaling weakness to examiners and markets.^[6] By the 1990s, stigma had solidified, linking window access primarily to troubled institutions during resolutions, which perpetuated underutilization despite the facility's lender-of-last-resort role.^[26]

Usage and Adaptations in the United States

Response to September 11, 2001 Attacks

Following the September 11, 2001, terrorist attacks, which disrupted payment systems and prompted the closure of U.S. financial markets from September 11 to September 14, the Federal Reserve immediately activated the discount window to supply emergency liquidity to depository institutions facing acute reserve shortages.^[30] On September 11, the Fed publicly affirmed that the discount window remained available to address liquidity needs amid the chaos.^[31] Discount window advances outstanding ballooned from a pre-attack average of $59 million to $45 billion by September 12, reflecting a massive surge driven by halted interbank settlements and withdrawal pressures that threatened reserve drains.^[30]^[32] This injection of funds stabilized interbank lending rates and prevented a broader liquidity crisis by compensating for the temporary breakdown in normal payment flows, where banks' outgoing payments exceeded incoming ones due to the attacks' impact on Lower Manhattan facilities.^[33] The Fed complemented discount window lending with open market operations, but the initial borrowing spike directly addressed immediate bank-level liquidity gaps without requiring changes to standard collateral requirements at the outset.^[34] As markets reopened on September 17, discount window usage began to decline rapidly, with advances reverting toward pre-attack levels within weeks as payment systems normalized and confidence returned.^[32] The episode demonstrated the discount window's role in averting panic through targeted short-term lending, with borrowing peaking and then contracting without evidence of sustained dependency or distortions in reserve management practices.^[30] Total liquidity provision, including $45 billion in peak discount loans, ensured that aggregate bank balances at the Fed remained sufficient to support payment finality, facilitating a swift return to operational stability by late September 2001.^[33]

Modifications During the 2007-2009 Financial Crisis

In August 2007, as interbank lending markets tightened amid early signs of subprime mortgage distress, the Federal Reserve Board reduced the spread between the primary credit rate and the target federal funds rate from 100 basis points to 50 basis points to encourage greater use of the discount window by solvent depository institutions facing temporary liquidity needs.^[35] This adjustment aimed to lower the perceived penalty for borrowing, though empirical analysis later showed limited immediate uptake due to persistent stigma concerns among banks fearing supervisory scrutiny or market signals of weakness.^[36] On March 16, 2008, amid the collapse of Bear Stearns and broader market turmoil, the Federal Reserve further modified discount window terms by reducing the primary credit spread to 25 basis points above the federal funds target and extending maximum loan maturities from overnight to up to 90 days, allowing institutions to address funding mismatches over longer horizons.^[37] Concurrently, the Fed established the Primary Dealer Credit Facility (PDCF), an overnight lending program for primary dealers secured by a broad range of investment-grade securities, which effectively extended discount window-like access beyond traditional depository institutions; PDCF usage surged to a peak of approximately $150 billion in September 2008 following the Lehman Brothers failure.^[38] Discount window borrowing by depository institutions also scaled up significantly, reaching a peak of about $111 billion outstanding on October 15, 2008, reflecting heightened demand amid frozen private credit markets.^[35] Despite these easing measures, stigma continued to suppress direct discount window reliance, as evidenced by banks submitting bids at the Term Auction Facility (TAF)—introduced in December 2007 for anonymous term funding—that exceeded the prevailing discount rate, implying a willingness to pay a premium to avoid perceived DW signals of distress.^[36] This pattern, observed through arbitrage comparisons between TAF bids and DW rates, underscored a causal driver for supplementary tools like the TAF, which auctioned over $493 billion at its December 2008 peak, thereby channeling liquidity indirectly and informing the escalation to quantitative easing measures starting in November 2008 to restore broader market functioning.^[39] Following the acute crisis phase, the Federal Reserve normalized discount window operations; on February 18, 2010, it raised the primary credit spread back to 50 basis points above the federal funds rate and reverted typical maturities to overnight, aiming to discourage routine non-emergency borrowing and restore the facility's role as a backstop rather than a primary funding source.^[37] These changes aligned with provisions in the Dodd-Frank Act of 2010, which mandated public disclosure of individual discount window borrowings after a two-year lag to enhance transparency and accountability, though post-crisis data indicate sustained lower average usage compared to pre-2007 levels, partly attributable to elevated penalty pricing and regulatory oversight.^[27]^[40]

Role in the March 2023 Bank Failures

In early March 2023, Silicon Valley Bank (SVB) and Signature Bank faced acute liquidity pressures from rapid deposit outflows triggered by unrealized losses on long-duration securities portfolios amid rising interest rates, yet both institutions underutilized the Federal Reserve's discount window due to persistent stigma and operational unreadiness.^[41] SVB's contingent funding plan identified the discount window as a potential liquidity source, but the bank had not tested its borrowing arrangements or ensured adequate pre-positioned collateral in the preceding year, delaying access during the crisis.^[42] Signature Bank similarly sought discount window advances amid the turmoil, but fears that borrowing would signal weakness to depositors and markets—reinforcing perceptions of insolvency—discouraged proactive use, allowing runs to intensify.^[43]^[44] This hesitation exemplified how discount window stigma, rooted in concerns over regulatory scrutiny and reputational damage, can undermine the facility's role as a lender of last resort even when collateral-eligible assets are available.^[45] For SVB, the liquidity crunch was causally amplified by mark-to-market losses on its bond holdings, which eroded confidence and prompted $42 billion in withdrawals on March 9 alone, outpacing the bank's ability to liquidate assets without further losses; earlier discount window draws might have mitigated the spiral but were avoided.^[41] Post-failure, the Federal Reserve invoked Section 13(3) emergency powers and urged broader access, leading to a surge in aggregate discount window borrowing from $4.6 billion on March 9 to a peak of $152.9 billion on March 15 as other institutions preempted contagion risks.^[46]^[47] The events prompted a measurable shift in preparedness, with the number of institutions pre-positioned for discount window access rising 9.4% from 4,952 in 2022 to 5,418 in 2023, reflecting heightened recognition of liquidity vulnerabilities in a higher-rate environment.^[47] This uptick underscored the discount window's latent capacity to stabilize solvent banks, though the failures revealed gaps in testing and stigma reduction that prolonged the immediate crises.^[45]

Post-2023 Reforms and Ongoing Destigmatization Efforts

In November 2023, the Federal Reserve implemented updated collateral margins tables for discount window lending and payment system risk purposes, effective November 1, which adjusted valuation haircuts on various asset classes to reflect current market conditions and broaden the range of eligible collateral.^[48] These revisions aimed to enhance liquidity access by reducing barriers to pledging diverse securities and loans, without altering core eligibility criteria.^[49] Further refinements occurred in July 2025, with new collateral margins tables taking effect on July 1, incorporating ongoing adjustments to account for volatility in asset values and facilitating pre-positioning of collateral to expedite borrowing during stress.^[50]^[20] Empirical analysis from Federal Reserve research indicates that banks with pre-pledged collateral are significantly more likely to utilize the discount window, as this preparation mitigates operational delays and supports rapid liquidity provision.^[51] To address persistent stigma, the Federal Reserve has pursued destigmatization through educational initiatives and policy communications, emphasizing the window as a routine liquidity tool rather than a signal of distress.^[52] Vice Chair for Supervision Michael Barr stated in September 2024 that discount window borrowing should become a normalized funding source, with regulatory updates designed to eliminate associated reputational risks.^[53] Despite these efforts, data reveal recurring hesitation: stigma effects diminished post-2020 but reemerged by mid-2022, prompting renewed focus on testing protocols and transparency measures to encourage proactive use.^[54] Legislative proposals, such as Senator Mark Warner's July 2024 bill, seek to modernize operational aspects like intraday credit extensions, aiming to align the facility with faster payment systems and further reduce access frictions.^[55] Industry analyses highlight that while borrowing volumes increased modestly post-2023, weekly disclosure practices continue to contribute to residual stigma, underscoring the need for calibrated reforms to balance usability with market discipline.^[56]

Implementation in Other Central Banking Systems

The Eurozone's Marginal Lending Facility

The European Central Bank's Marginal Lending Facility (MLF) functions as a standing overnight lending mechanism for eligible euro-area credit institutions, offering access to liquidity from national central banks within the Eurosystem until the close of ECB business hours each trading day. Counterparties can obtain unlimited funds at a fixed penalty rate, set by the Governing Council typically 25 basis points above the main refinancing rate, in exchange for eligible collateral mobilized through the Eurosystem Collateral Framework. This rate establishes the upper limit of the ECB's policy interest rate corridor, incentivizing banks to primarily manage liquidity via open market operations while providing a backstop against end-of-day shortfalls.^[57]^[58]^[59] Structurally, the MLF differs from the U.S. Federal Reserve's discount window by embedding it as an integral, non-stigmatized component of routine monetary policy implementation, with uniform eligibility criteria, collateral standards, and operational procedures matching those for standard refinancing tenders. Banks initiate access autonomously without prior approval or enhanced supervision, and the ECB refrains from framing the facility as a distress signal, avoiding the supervisory disclosures and rate penalties that amplify reluctance in the U.S. context. This design fosters more consistent usage patterns, as evidenced by econometric analyses showing minimal market penalties for MLF borrowers during liquidity squeezes, in contrast to the aversion observed at the Fed where borrowing correlates with equity price declines.^[60]^[61] The facility's collateral requirements draw from a expansive pool under the Eurosystem framework, accepting over 15,000 asset types including marketable debt securities, asset-backed securities, and non-marketable assets like credit claims, with euro-area sovereign bonds forming a core eligible category subject to haircuts based on credit ratings and liquidity. This breadth accommodates the eurozone's supranational structure, where monetary policy must navigate heterogeneous national fiscal risks without the U.S. federal system's centralized Treasury backstop, enabling collateralization of periphery government debt to mitigate cross-border spillovers. During the 2010–2012 sovereign debt crisis, heightened interbank funding strains led to increased but contained recourse to the MLF as a daily buffer, complementing the ECB's shift toward longer-term operations; aggregate standing facility data reflect this role in absorbing shocks without the self-reinforcing stigma cycles seen in decentralized U.S. borrowing, thereby aiding systemic stabilization amid elevated sovereign-bank linkages.^[62]^[63]^[60]

Comparative Practices in Other Major Economies

In the United Kingdom, the Bank of England's Discount Window Facility (DWF), established as part of the Sterling Monetary Framework in 2008 and refined post-financial crisis, functions as a standing bilateral lending mechanism providing eligible institutions with reserves and gilts against a broad range of collateral at a penalty rate of 25 basis points above the Bank Rate for indexed and contingent term repo (CTR) operations, or higher for standard DWF loans.^[64]^[65] To mitigate stigma, the framework incorporates routine indexed long-term repo tests, conducted quarterly since 2010, where participants borrow against simulated collateral stresses, normalizing access and revealing uptake data indicating average borrowing of £2-5 billion per test without signaling distress.^[66] This contrasts with pre-2008 standing facilities by emphasizing term funding via inflation-linked gilts, reducing reliance on overnight loans and aligning with market-based collateral valuation to limit moral hazard.^[67] Canada's Bank of Canada operates the Standing Liquidity Facility (SLF), introduced in 2009 alongside post-GFC reforms, offering direct participants secured overnight advances at the overnight target rate plus a 25-basis-point spread against high-quality collateral valued at market prices with haircuts, ensuring liquidity provision reflects current funding costs to avoid subsidization.^[68] Complementing this, the Standing Term Liquidity Facility (STLF), launched in 2020, extends loans up to 90 days for temporary needs without solvency concerns, priced similarly with collateral eligibility expanded to include corporate debt, emphasizing pre-approval and automated pricing to minimize administrative distortions.^[69] BIS analyses highlight how such facilities prioritize market-aligned penalties, with Canadian data post-2009 showing SLF usage averaging under 1% of reserves in non-crisis periods, underscoring design features that deter routine reliance while enabling elastic supply during stress.^[70] Across major economies like Japan and Australia, post-GFC enhancements to standing facilities—such as the Bank of Japan's complementary deposit and lending facilities at policy rates since 2016, or the Reserve Bank of Australia's committed liquidity facility with daily auctions—exhibit a global shift toward permanent, collateral-secured access, yet empirical evidence from BIS monitoring indicates persistent underutilization outside crises, with average daily draws below 5% of eligible collateral in stable conditions from 2010-2023, attributed to penalty pricing and collateral requirements that preserve incentives for private market funding.^[71]^[72] These variations underscore a common emphasis on verifiable solvency checks and broad collateral pools to differentiate from emergency assistance, fostering cross-jurisdictional convergence on facilities that balance stability without crowding out interbank markets.^[73]

Controversies, Risks, and Economic Impacts

The Stigma of Discount Window Borrowing

The stigma of discount window borrowing manifests as banks' aversion to using the Federal Reserve's lender-of-last-resort facility, driven by fears that such access signals underlying liquidity or solvency issues to market participants and supervisors, potentially triggering reputational damage or heightened scrutiny.^[74] Empirical studies document this reluctance through patterns like banks paying higher interest rates in private markets rather than borrowing at the lower discount window rate, even during periods of funding stress, as observed in analyses spanning the post-2008 era up to 2024.^[27]^[74] Further evidence appears in borrowing patterns following policy announcements that increase visibility of usage, with aggregate discount window loans dropping sharply—for instance, after enhanced disclosure requirements in the late 2000s, uptake fell despite ample collateral eligibility among solvent institutions.^[75] This signaling effect persists across eras, as banks anticipate adverse inferences about their health from mere association with the window, independent of actual pricing incentives.^[76] Historically, this reluctance has endured despite targeted reforms, such as the 2003 overhaul that introduced "primary credit" for sound banks on a no-questions-asked basis at a penalty rate above the federal funds target, explicitly designed to mitigate perceived weakness signals.^[27] Earlier practices, including subsidized lending rates in the 1960s that temporarily boosted usage but reinforced dependency concerns, gave way to stricter signaling dynamics by the 1970s, when borrowing again declined amid market wariness.^[6] Federal Reserve research highlights supervisory fears as a primary driver, with banks citing potential regulatory downgrades or intensified examinations as deterrents, evidenced by surveys and borrowing data showing larger institutions—more exposed to oversight—eschewing the window even when reserves are scarce.^[77] These dynamics illustrate a self-reinforcing loop where anticipated regulatory reactions amplify the perceived costs of access, sustaining low utilization rates through the 2010s and into recent "normal" times.^[12] Counterarguments posit that the observed aversion reflects rational market penalties rather than purely irrational stigma, as discount window usage conveys credible information about a bank's liquidity management, prompting justified repricing of uninsured deposits or wholesale funding.^[78] Causal analyses of borrowing episodes reveal that funding cost increases post-usage align with heightened default risk proxies, such as asset volatility, suggesting markets efficiently incorporate the signal without overreaction.^[75] This view holds that while stigma terminology frames the reluctance pejoratively, the underlying mechanism serves as a market discipline tool, deterring excessive risk-taking absent central bank intervention distortions.^[76]

Moral Hazard, Incentive Distortions, and Criticisms of Central Bank Intervention

The availability of discount window lending creates moral hazard by diminishing banks' incentives to prudently manage liquidity and credit risks, as institutions anticipate central bank support to avert insolvency during stress periods.^[79]^[12] Even when priced at penalty rates above prevailing market levels, such facilities signal an implicit backstop that encourages excessive maturity transformation and leverage, as banks internalize only a fraction of potential failure costs.^[80] This dynamic parallels broader lender-of-last-resort operations, where the prospect of rescue funding shifts risk from private actors to the central bank and ultimately taxpayers.^[79] Empirical analyses reveal that banks anticipating access to emergency discount window facilities undertake fewer precautionary actions, such as pledging additional collateral or conducting operational tests of borrowing capacity.^[81] For example, institutions eligible for primary credit during the post-2008 period demonstrated reduced proactive engagement with discount window protocols, correlating with heightened reliance on central bank liquidity in subsequent stresses.^[81] Critics contend these patterns contributed to the pre-2007-2009 crisis surge in banking leverage, where U.S. institutions expanded balance sheets by over 50% in asset terms from 2000 to 2007, partly under the assumption of Federal Reserve intervention insulating them from market repercussions.^[79] Such evidence underscores how penalty pricing alone fails to fully internalize risks, fostering systemic vulnerabilities.^[82] Beyond individual bank behavior, discount window interventions distort broader market incentives by sustaining inefficient institutions that might otherwise face resolution or acquisition, thereby postponing Schumpeterian creative destruction in the financial sector.^[79] This propping-up effect weakens creditor monitoring and deposit pricing signals, as market participants discount failure probabilities in light of perceived central bank guarantees, leading to lax underwriting standards and capital allocation inefficiencies.^[82] Post-2008 expansions of discount window authority, which peaked at over $110 billion in outstanding loans by late 2008, have been associated with prolonged survival of underperforming banks, correlating with elevated non-performing loan ratios persisting into the 2010s and hindering resource reallocation to more productive entities.^[12] Free-market oriented economists argue this undermines competitive discipline, as evidenced by studies showing diminished bond yield spreads for banks with stronger perceived access to Federal Reserve facilities, reflecting artificially suppressed risk premia.^[79]

Empirical Evidence on Stability Benefits Versus Market Interference

Empirical analyses of Federal Reserve discount window operations indicate that targeted liquidity provision has mitigated short-term market disruptions. For instance, during episodes of reserve scarcity, banks' increased borrowing from the discount window correlates with stabilized interbank lending rates, as institutions avoid forced asset sales that could amplify volatility.^[83] Federal Reserve models further demonstrate that discount window access reduces overall reserve market volatility by enabling banks to meet sudden funding needs without relying on strained private markets, thereby preventing escalations into broader panics.^[84] In the 2023 banking stresses, emergency discount window lending was linked to diminished investor risk perceptions, with data showing a rapid decline in credit default swap spreads for affected institutions post-intervention.^[85] Conversely, econometric studies highlight moral hazard risks, where the availability of discount window funding incentivizes banks to maintain lower precautionary liquidity buffers, potentially distorting market discipline.^[86] Empirical evidence from pre- and post-crisis periods reveals that banks with easier access to central bank lending exhibit higher risk-taking behaviors, such as reduced cash-to-asset ratios, as the implicit backstop diminishes the costs of illiquidity.^[87] Critics, drawing on rediscounting models, argue this facilitates unresolved solvency issues by enabling temporary bailouts rather than market-driven resolutions, with regressions showing positive correlations between discount window expansions and subsequent episodes of excessive leverage buildup.^[82] From a longer-term perspective, the persistence of financial crises—such as those in 2007-2009 and 2023—despite enhanced lender-of-last-resort mechanisms underscores a trade-off: while short-term stability is achieved through liquidity injections, these interventions may erode incentives for private risk management, fostering recurring vulnerabilities.^[88] Proponents of alternatives, including historical private clearinghouse systems, contend that decentralized mechanisms impose stricter discipline without central distortions, though modern empirical comparisons remain limited due to the dominance of public LOLR frameworks.^[89] Overall, while discount window data affirm crisis containment efficacy, the causal chain from subsidized liquidity to diminished long-run efficiency warrants scrutiny, as evidenced by unchanged crisis frequency amid policy expansions.^[90]

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The Federal Reserve's Response to the Sept. 11 Attacks
The Fed directly lent funds to banks through the discount window. The $45 billion in discount loans outstanding on Sept. 12 dwarfed the $59 million average ...
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Federal Reserve open and operating -- September 11, 2001
Sep 11, 2001 · The Federal Reserve System is open and operating. The discount window is available to meet liquidity needs. 2001 Monetary policy | 2001 ...Missing: 9/11 | Show results with:9/11
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[PDF] Liquidity Effects of the Events of September 11, 2001
Discount window loans rose from around $200 million to about $45 billion on. September 12; later, when markets began to function better, Federal Reserve open ...
[33]
Liquidity Effects of the Events of September 11, 2001
Their analysis suggests that the significant injections of liquidity by the Federal Reserve, first through the discount window and later through open market ...Missing: post- timeline
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The Federal Reserve's Response to the September 11 Terrorist ...
The September 11 terrorist attacks on the United States created massive dislocations in US financial markets. The Federal Reserve, as the central bank of ...
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Lending to depository institutions - Federal Reserve Board
May 13, 2021 · This page discusses lending to depository institutions (discount window lending) as implemented during and after the financial crisis that emerged in 2007.Missing: modifications | Show results with:modifications<|separator|>
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[PDF] Discount Window Stigma during the 2007-2008 Financial Crisis
In the US, the Federal Reserve (the Fed) uses the Discount Window (DW) to fulfill this task. Historically, however, the DW has been little used, even when banks ...Missing: modifications | Show results with:modifications
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Federal Reserve approves modifications to the terms of its discount ...
Feb 18, 2010 · On March 16, 2008, the Federal Reserve lowered the spread of the primary credit rate over the target federal funds rate to 1/4 percentage point ...Missing: 1960-2000 | Show results with:1960-2000
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Federal Reserve Liquidity Programs: An Update
Usage spiked higher yet to $150 billion in September 2008, when Lehman filed for bankruptcy and the Federal Reserve expanded PDCF-eligible collateral in ...
[39]
[PDF] The Discount Window during the Early Stages of the Financial Crisis
The discount window, a "lender-of-last-resort," was used to combat the crisis by narrowing the spread between the discount rate and target rate to provide ...<|separator|>
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[PDF] The Fed's Discount Window: An Overview of Recent Data
Mar 20, 2018 · Normally, secondary credit is offered at a rate that is 50 basis points above the primary credit rate. Furthermore, secondary credit loans are ...<|separator|>
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[PDF] svb-review-20230428.pdf - Federal Reserve Board
Apr 28, 2023 · For example, SVB did not test its capacity to borrow at the dis- count window in 2022 and did not have appropriate collateral and operational ...
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[PDF] Lessons for the Discount Window from the March 2023 Bank Failures
Jul 23, 2024 · A foundational responsibility of any central bank is to serve as the lender of last resort to the banking system to facilitate the ongoing flow ...
[43]
Anticipatory discount window stigma - Dallasfed.org
Sep 6, 2024 · In March 2023, Silicon Valley Bank (SVB) and Signature Bank came under severe stress and sought to borrow from the discount window. The ...
[44]
Improving The Government's Lender of Last Resort Function
Apr 24, 2023 · All discount window loans have to be “collateralized to the satisfaction of the lending reserve bank.” The Fed accepts essentially all bank ...
[45]
Lessons for the Discount Window from the March 2023 Bank Failures
A foundational responsibility of any central bank is to serve as the lender of last resort to the banking system to facilitate the ongoing flow of credit to the ...
[46]
What did the Fed do after Silicon Valley Bank and Signature Bank ...
As of May 8, it was 5.25%. Banks are sometimes reluctant to borrow at the discount window because, if word gets out, it may suggest that the bank is in trouble.
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Central Bank Lending Lessons from the 2023 Bank Crisis
Between 2022 and 2023, the number of institutions signed up to use the discount window increased by 9.4 percent, from 4,952 to 5,418. Ennis says that to the ...
[48]
Updated Collateral Margins Tables
Sep 29, 2023 · The Federal Reserve is implementing updated collateral margins for Discount Window lending and Payment System Risk purposes, effective November 1, 2023.Missing: revisions | Show results with:revisions
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Updated Collateral Margins Tables
Nov 1, 2023 · The updated collateral margins tables can be viewed on the Collateral Valuation page of the Discount Window and Payment System Risk website.Missing: revisions | Show results with:revisions
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Discount Window
The Federal Reserve is implementing updated collateral margins tables for Discount Window lending and Payment System Risk purposes, effective July 1, 2025.General Information · Borrowing · Discount Rates · Getting StartedMissing: central | Show results with:central
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Pre-Pledged Collateral and Likelihood of Discount Window Use
Aug 29, 2025 · In order to borrow from the discount window, a DI needs to pledge collateral to the Federal Reserve. Some types of collateral, especially ...
[52]
Unlocking the Discount Window - Bank Policy Institute
Oct 3, 2025 · Prompted by the 2023 banking turmoil, policymakers are increasingly working to reform and destigmatize the Federal Reserve's discount window ...<|separator|>
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Banks' use of discount window can be part of the norm: Fed's Barr
Sep 27, 2024 · Barr's speech reiterated the Fed's effort to include new rules and remove the stigma that may accompany borrowing from the central bank to ...Missing: destigmatization | Show results with:destigmatization
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Discount Window Stigma After the Global Financial Crisis
Jan 17, 2025 · Surprisingly, realized stigma did not surge after the failure of Silicon Valley Bank (SVB) on March 9, 2023.
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Warner Introduces Legislation to Modernize Federal Reserve ...
Jul 26, 2024 · Require Regulators to Reflect Banks' Ability to Use the Discount Window in Liquidity Evaluations: Regulators must “give credit” in their ...
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Weekly Fed Report Still Drives Discount Window Stigma
Apr 3, 2024 · These weekly publications still risk “outing” the discount window borrowing of a large bank based in a particular region.
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Key ECB interest rates - European Union
Marginal lending facility: The rate on the marginal lending facility, which offers overnight credit to banks against broad collateral at a pre-set interest rate ...
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What are standing facilities? - ECB interest rates - Banco de España
The marginal lending facility enables banks to obtain overnight liquidity from national central banks at a rate of interest determined by the ECB. There is ...
[59]
What-is-the-marginal-lending-facility-rate
The marginal lending facility rate is the interest rate banks pay when they borrow from the ECB overnight. When they do this, they have to provide collateral, ...
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Is Stigma Attached to the European Central Bank's Marginal ...
Apr 16, 2018 · At the ECB, the counterparty and collateral policies are identical for open market operations and the marginal lending facility. This ...
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[PDF] The ECB's Future Monetary Policy Operational Framework
In this case, a central bank can adjust the supply of reserves with “fine-tuning” open market operations and/or use standing deposit and lending facilities ...
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[PDF] The Eurosystem collateral framework explained
The Eurosystem collateral framework (ESCF) has played a key role in the ECB monetary policy implementation since 1999. Moreover, the financial and sovereign.
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[PDF] Collateral eligibility requirements - a comparative study across ...
Other central banks, such as the. Federal Reserve System and the Bank of England, only accept credit claims as part of their discount window facilities. Central ...<|separator|>
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Bank of England Market Operations Guide: Our tools
Discount Window Facility (DWF). The DWF is a bilateral facility, allowing firms to borrow highly liquid assets (gilts and reserves) on demand ...
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[PDF] SMF Operating Procedures - Bank of England
2.2. All legal entities within a Group which are eligible to act as Participants in the SMF may apply for access to the Discount Window Facility (DWF), and Open ...
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[PDF] United Kingdom: Discount Window Facility - EliScholar
Jun 15, 2022 · The Discount Window Facility was, and continues to be, a part of the Sterling Monetary Framework, which includes the Standing Facilities (Bank ...
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[PDF] Liquidity support from the Bank of England - the Discount Window ...
Mar 29, 2012 · Although it is a contingent facility, the ECTR is a permanent part of the Bank's Sterling Monetary Framework. The design of the ECTR shares ...
[68]
Market operations, programs and facilities - Bank of Canada
The Bank's Standing Liquidity Facility (SLF) provides access to liquidity, in the form of secured overnight advances, to direct participants in Lynx.Missing: equivalent | Show results with:equivalent
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Standing Term Liquidity Facility - Bank of Canada
The STLF provides loans to eligible financial institutions for temporary liquidity support if the Bank has no concerns about their financial soundness.Missing: discount window equivalent
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[PDF] Rethinking banks' liquidity requirements
May 12, 2025 · Section 3 explores the role of central bank lending facilities and analyses recent initiatives to strengthen these frameworks. Building on these ...
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The Fed - Central bank liquidity facilities around the world
Feb 26, 2025 · This note provides an overview of liquidity facilities around the world that resemble the Federal Reserve's discount window as well as intraday credit.
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[PDF] Navigating liquidity stress: operational readiness for central bank ...
Dec 14, 2024 · First, banks and central banks need to have the necessary operational capacity. Second, banks need to post collateral, and the central bank, ...
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[PDF] Eliminating Discount Window Stigma - EliScholar
Apr 15, 2025 · This article examines how other central banks' liquidity tools can inform redesigning the discount window to reduce stigma, as banks' ...
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[PDF] Discount Window Stigma After the Global Financial Crisis
We study Discount Window (DW) stigma, the reluctance to access the Federal Reserve's lender-of-last- resort facility, between 2014 and 2024.
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Discount window stigma during the 2007–2008 financial crisis
DW stigma is a reluctance to borrow from the Discount Window due to fear of being seen as weak, which can lead to costly alternatives and reduced loans.Missing: persistence | Show results with:persistence
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Is There Stigma Associated with Discount Window Borrowing?
There is considerable anecdotal and empirical evidence suggesting that banks are reluctant to borrow from the Fed's discount window.
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Discount Window Borrowing 2003-2019
Aug 26, 2024 · We provide empirical evidence that banks more concerned about supervisory or market reactions to discount window borrowings, particularly very large banks, ...
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Understanding Discount Window Stigma | Richmond Fed
Although the discount window has existed in various forms almost since the creation of the Fed more than a century ago, some aspects of its operation ...
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[PDF] Re-thinking the lender of last resort - Bank for International Settlements
On the other hand, central bank LOLR is seen as very risky; as it potentially creates moral hazard on a massive scale, exposes the central bank to large ...
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Rediscounting under Aggregate Risk with Moral Hazard
With moral hazard, the central bank should avoid absorbing losses, contrary to Freeman's argument. However, we show that the outcomes of discount window ...
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[PDF] Emergency Lending and Moral Hazard - FDIC
Aug 27, 2025 · In this paper, we examine the moral hazard associated with the emer- gency response to the banking turmoil that erupted in the U.S. in March of ...
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[PDF] Three Discount Windows
was used the week after 9/11 to meet heightened liquidity needs); The Federal Reserve Dis- count Window, FED. RES. DISCOUNT WINDOW & PAYMENT SYS. RISK (Mar. 18, ...Missing: timeline | Show results with:timeline<|separator|>
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[PDF] Discount window borrowing and the role of reserves and interest rates
Feb 18, 2025 · We find that banks borrow more when their reserves are low and when the discount rate is relatively attractive, although the size of these ...
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[PDF] Scarce, Abundant, or Ample? A Time-Varying Model of the Reserve ...
the end of the day, banks can also borrow reserves from the central bank's discount window ... Federal Reserve responds to unusual volatility in the federal funds ...<|separator|>
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Calming the Panic: Investor Risk Perceptions and the Fed's ...
Sep 30, 2025 · A look at the effect of the Federal Reserve's emergency lending on investor risk perceptions during the bank run of 2023.
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[PDF] Reducing Moral Hazard at the Expense of Market Discipline
Our empirical analysis begins by comparing the risk-taking behavior of single- and double- liability banks. We examine banks' ratios of cash to assets and ...
[87]
[PDF] Reducing Moral Hazard at the Expense of Market Discipline - FDIC
11 Several empirical studies have examined how deposit insurance affected the ... The discount window reduced liquidity risk and allowed them to expand ...
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[PDF] The Lender of Last Resort Function after the Global Financial Crisis
There are a number of circumstances in which a central bank may wish or need to provide reserve money (and other forms of liquidity) to the banking system.
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[PDF] The Lender Of Last Resort A Historical Perspective - Cato Institute
But the confusion becomes especially apparent in analyses of international financial crises and particularly when a role for an international LLR is proposed.Missing: recurring | Show results with:recurring
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[PDF] Central Banking Post Crises - Federal Reserve Board
Sep 28, 2023 · During the recent global financial crisis, central banks throughout the world not only performed this lender of last resort role by providing ...