The discount window is an instrument of the monetary authorities that consists of granting loans , usually in the short term, to banks . It is mainly used so that financial institutions can close daily with the level of reserves required by law.
However, these financings charge an interest rate (discount rate) approximately 1% higher than the average for interbank deposits . For this reason, credit institutions prefer other mechanisms to obtain funds.
The discount window doesn’t always get that name. In the old continent, for example, there are permanent facilities. Among which are the marginal credit facility and the deposit facility. It is the marginal credit facility that we refer to in this article.
. These are loans provided by the Eurosystem , the monetary authority of the eurozone.
Federal Reserve System discount window
The discount window of the US Federal Reserve System (FED) It is one of the best known. Since 1980, any bank can use it, including foreigners.
The operation of the discount sale requires the requesting institution to present guarantees to the FED. These can be Treasury Bills , US government bonds and promissory notes , state and local government securities, AAA mortgages , consumer loans , and business loans .
In 1999, the Fed also accepted certificates of deposit (CDs) and securities backed by mortgages AAA – rated.
Using the discount window
The use of the discount window may have monetary policy objectives . Thus, your interest rate increases to reduce the money supply . In the US, the federal funds rate is generally raised at the same time , which is the rate at which banks lend capital to each other in the Fed, usually overnight .
As a result of a higher discount rate, financing between credit institutions is reduced and the rate of economic growth slows down . Thus, a restrictive monetary policy is being implemented .
On the contrary, if the authorities want to apply an expansive monetary policy , the discount rate will be lowered. In this way, it will be cheaper for banks to obtain funds and they will be able to extend more credit . This is one way to boost economic activity.