Discount window

Discount window

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 term originated with the practice of sending a bank representative to a reserve bank teller window when a bank needed to borrow money.[1]

The interest rate charged on such loans by a central bank is called the discount rate, base rate, or repo rate, and should not be confused with the Prime rate. It is also distinct from the federal funds rate and 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.

Contents

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. The Federal Reserve does not publish information regarding institutions' eligibility for primary or secondary credit.[2] 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.

Institutions must provide acceptable collateral to secure the loan.

Alterations during 2007-2009 'credit crunch'

On August 17, 2007, the Board of Governors of the Federal Reserve announced[3] a temporary change to primary credit lending terms. The discount rate was cut by 50 bp — to 5.75% from 6.25% — and the term of loans was extended from overnight to up to thirty days. This reduced the spread of the primary credit rate over the fed funds rate from 100 basis points to 50 basis points.

On March 16, 2008, concurrent with measures to rescue Bear Stearns from insolvency and to stem further institutional bank runs, the Federal Reserve announced [4] significant and temporary changes to primary credit lending terms. The maximum term of loans was extended from thirty days to ninety days. Less than a year before the term was only overnight. The primary credit rate was also reduced to 3.25% from 3.50%, which cut the spread of the primary credit rate over the fed funds rate to 25 basis points from 50 basis points.

Recent changes to rates
Date Discount rate (change) Fed funds target rate/range (change)
Jan - July, 2007 6.25% 5.25%
August 17, 2007 5.75% (−50 bp) 5.25% (no change)
September 18, 2007 5.25% (−50 bp) 4.75% (−50 bp)
October 31, 2007 5.00% (−25 bp) 4.50% (−25 bp)
December 11, 2007 4.75% (−25 bp) 4.25% (−25 bp)
January 22, 2008 4.00% (−75 bp) 3.50% (−75 bp)
January 30, 2008 3.50% (−50 bp) 3.00% (−50 bp)
March 16, 2008 3.25% (−25 bp) 3.00% (no change)
March 18, 2008 2.50% (−75 bp) 2.25% (−75 bp)
April 30, 2008 2.25% (−25 bp) 2.00% (−25 bp)
October 8, 2008 1.75% (−50 bp) 1.50% (−50 bp)
October 29, 2008 1.25% (−50 bp) 1.00% (−50 bp)
December 16, 2008 0.50% (−75 bp) 0–0.25% (−75 bp)
January 16, 2009 0.50% (no change) 0-0.25% (no change)
February 18, 2010 0.75% (+25bp) 0−0.25% (no change)

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.[5] 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.

Usage after September 15, 2008

With the bankruptcy of Lehman Brothers again the volume of borrowing requests increased dramatically, and in the course of the Great Recession remains worldwide on a high level. Banks lend not directly each other, but to the central bank and, on the other side, borrow not directly from each other, but from the central bank.

In the eurozone

In the eurozone the discount window is called Standing Facilities, which are used to manage overnight liquidity. Qualifying counterparties can use the Standing Facilities to increase the amount of cash they have available for overnight settlements using the Marginal Lending facility. Conversely, excess funds can be deposited within the European Central Bank System (ECBS) and earn interest using the Deposit facility.

Usage of the deposit facility of the Deutsche Bundesbank.

Counterparties must have collateral for the funds they receive from the Marginal Lending facility and will be charged the overnight rate set by the ECBS. Excess capital can be deposited with the Deposit facility and they will earn interest at the rate offered by the ECBS. The rates for these two facilities signal the central bank system’s outlook for commercial interest rates and sets the upper and lower limit for interest rates on the overnight market.[6]

See also

External links

References

  1. ^ "Discount window". Answers.com. http://www.answers.com/topic/discount-window. Retrieved 14 May 2011. 
  2. ^ Federal Reserve Q&A #10
  3. ^ "FOMC Statement" (Press release). Federal Reserve. 2007-08-17. http://www.federalreserve.gov/newsevents/press/monetary/20070817a.htm. Retrieved 2008-09-19. 
  4. ^ "Federal Reserve announces two initiatives designed to bolster market liquidity and promote orderly market functioning" (Press release). Federal Reserve. 2008-03-16. http://federalreserve.gov/newsevents/press/monetary/20080316a.htm. Retrieved 2008-03-17. 
  5. ^ W. Ferguson, Jr., Roger (February 5, 2003). "September 11, the Federal Reserve, and the Financial System". The Federal Reserve Board. http://www.federalreserve.gov/boarddocs/speeches/2003/20030205/default.htm. Retrieved 14 May 2011. 
  6. ^ "European Central Bank". FXPedia.com. http://www.fxpedia.com/European_Central_Bank. Retrieved 14 May 2011. 

Wikimedia Foundation. 2010.

Игры ⚽ Поможем сделать НИР

Look at other dictionaries:

  • Discount window — Facility provided by the Fed enabling member banks to borrow reserves against collateral in the form of governments or other acceptable paper. The New York Times Financial Glossary * * * discount window ˈdiscount ˌwindow noun [countable] BANKING… …   Financial and business terms

  • discount window — Facility provided by the Fed enabling member banks to borrow reserves against collateral in the form of government securities or other acceptable paper. Bloomberg Financial Dictionary * * * discount window ˈdiscount ˌwindow noun [countable]… …   Financial and business terms

  • Discount Window — Credit facilities in which financial institutions go to borrow funds from the Federal Reserve. These loans, which are priced at the discount rate, are often structured as secured loans to alleviate pressure in reserve markets. It helps to reduce… …   Investment dictionary

  • discount window —  Term referring to Federal Reserve short term loans to banks.  ► “Large banks must make greater efforts than others to obtain funding in national money markets before turning to the discount window; these banks usually turn to the window only… …   American business jargon

  • discount window — opportunity given to banks to borrow funds from the central bank following unexpected changes in their accounts …   English contemporary dictionary

  • discount window — / dɪskaυnt ˌwɪndəυ/ noun US a way in which the Federal Reserve grants loans to a bank by giving advances on the security of Treasury bills which the bank is holding …   Dictionary of banking and finance

  • Discount rate — Taux d escompte NB : À ne pas confondre avec taux d actualisation. Le taux d escompte est un taux d intérêt utilisé sur le marché monétaire, pour les prêts à très court terme (quelques jours). Le terme escompte caractérise la particularité… …   Wikipédia en Français

  • Discount rate — For the interest rate charged to banks for borrowing short term funds directly from the Federal Reserve, see discount window. For the fees charged to merchants for accepting credit cards, see Discount Rate under Merchant Account. For discount… …   Wikipedia

  • window — The period of time between the expected first principal payment and the last anticipated principal payment for a specific REMIC tranche. American Banker Glossary A brokerage firm s cashier department, where delivery of securities and settlement… …   Financial and business terms

  • Window Shortened —    A reference to a Federal Reserve Bank discount window.    ► See also Federal Reserve System …   Financial and business terms

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”