Discount window

Definition

The discount window is a lending facility provided by central banks, allowing financial institutions to borrow money at a discounted interest rate. It serves as a mechanism for maintaining liquidity and stability in the financial system.

5 Must Know Facts For Your Next Test

1. The discount window is primarily used during periods of financial stress or liquidity shortages.
2. Loans from the discount window are typically short-term, often overnight.
3. Interest rates charged on these loans are known as the discount rate, which is set by the central bank.
4. Borrowing through the discount window can signal weakness in a financial institution, so it is often used discreetly.
5. The Federal Reserve's use of the discount window became particularly prominent during the 2008 financial crisis to ensure market stability.

Review Questions

• What purpose does the discount window serve in the financial system?
• How does borrowing from the discount window affect a financial institution's reputation?
• Why did the use of the discount window become significant during the 2008 financial crisis?

Related terms

Federal Reserve:

The central banking system of the United States responsible for monetary policy.

Liquidity:

The ability to quickly convert assets into cash without significant loss in value.

Discount Rate:

The interest rate charged by central banks on loans extended to commercial banks or other depository institutions via the discount window.