FED Discount Window
Overview
Basically for banks that are in great need of liquidity because they are not able to obtain it from the markets anymore. They use it to avoid fire sales of their assets. The lending is usually overnight, but it can be extended to 90 days.[1]
Discount Window Stigma [2][3]
Seems that banks are very reluctant to use the discount windown from the FED due to the bad reputation it could bring about their finantial health, and usually only do it when it is the only solution left. This could be the reason too, that the FED has to create other lending facilities.
- For decades, banks have demonstrated some reluctance to use the discount window in this manner out of concern that the act of borrowing might send a negative signal about their financial conditions to their counterparties, their competitors, their regulators, and the public.
- During stress events, stigma may become even worse than in normal times. When investors are particularly concerned about difficulties at banks, they may pay extra attention to any signals of potential weakness. Investors in bank debt, including depositors, may also react more strongly to such signals in times of stress, particularly if they are not covered by deposit insurance.
- For example, in August 2007, banks were extremely reluctant to turn to the discount window, which led to a great degree of caution in managing their liquidity and a disruption in the interbank market as a means to distribute liquidity. As concerns about bank conditions increased over the course of the financial crisis, the problems associated with stigma may have intensified. This likely resulted in significantly more stress in the interbank funding markets and tighter financial conditions than might have existed otherwise, in addition to more financial contagion.
- A sign of stigma during the crisis was the willingness of banks to borrow funds at rates that exceeded the rate charged at the discount window, thus signifying their desire to avoid the window even when funding markets made funding costly to obtain.
- ↑ https://www.communitybankingconnections.org/articles/2020/i2/federal-reserve-discount-window-what-it-is-and-how-it-works
- ↑ https://www.federalreserve.gov/econres/notes/feds-notes/stigma-and-the-discount-window-20171219.html
- ↑ https://www.richmondfed.org/-/media/RichmondFedOrg/publications/research/economic_brief/2020/pdf/eb_20-04.pdf