The Washington PostDemocracy Dies in Darkness

What Is the Fed Discount Window and Why Are Banks Using It So Much?

The traditional role of central banks is to be a lender of last resort, and the traditional means by which the US Federal Reserve provides this backstop to the financial system is through what’s known as the discount window. In the tumultuous week ending March 15, banks borrowed $152.85 billion through the discount window, up from $4.58 billion the week before. The previous record was $111 billion, a mark reached during the 2008 financial crisis. Here’s what to know. 

1. What is the discount window and how does it work?

It’s the main direct lending facility provided by the Fed to support stability and provide liquidity to the US banking system. It enables the central bank to lend banks money for up to 90 days. While the service is always there, it’s particularly popular at moments of institutional or market stress when getting funds from elsewhere is proving difficult. The banks get the cash in return for providing collateral — securities like government bonds — that the central bank can keep if the loan isn’t repaid. 

2. Why is it called the ‘discount’ window?

The terms on which the money is offered have often been revised by the Fed depending on the circumstances, but they have historically involved lending less cash than the collateral is worth — a discount commonly known in banking parlance as a haircut. That adds an extra safety buffer for the Fed in case it doesn’t get paid back. It also makes the facility less attractive, so lenders will usually use it only if they really need to. The window’s emergency nature has also tended to mean that using the facility carries a sort of stigma for banks.

3. Why does the discount window exist?

Markets sometimes freeze up in a way that means banks can’t find the ready cash they need, putting households and businesses and thus the broader economy at risk if they can’t get funds either. Examples of when use of the window went up include after the Sept. 11 attacks, during the financial crisis and recession of 2007-2009, as the pandemic hit in 2020 and now in the days following the collapse of Silicon Valley Bank (SVB) and Signature Bank. 

4. How often is the discount window normally used?

Early in the pandemic, the Fed provided more than $50 billion in one week through the window. Weekly usage then declined to less than $5 billion through 2021 and not much more than $10 billion through last year. By the end of 2022, however, discount-window borrowing had risen to the highest level since June 2020. Combined with an increase in US banks’ borrowings through other channels, it suggested that banks were losing deposits as the Federal Reserve boosted interest rates. Demand for the discount window did retreat after that, however.

5. Why is the discount window being used so much now?

The collapse of SVB on March 10 and the closing of Signature two days later sent shockwaves through the financial system and prompted many households and businesses to consider moving their deposits out of banks they thought might be shaky. To avert further bank runs, a full-blown financial crisis and potential recession, the Fed decided to make it even easier for banks to borrow from the discount window. It began valuing the collateral it is offered in return for money “at par,” meaning at its face value, rather than follow the usual practice of imposing a haircut. That decision was partly taken to ease the stigma banks often feel exists when forced to borrow from the Fed. The central bank wanted to make borrowing from it an easier decision to take in the interest of insulating the wider financial system and economy. It also put the handling of discount window loans in line with a new emergency loan facility it had created. 

6. What’s the other new loan facility? 

The Bank Term Funding Program (BTFP) was created in the wake of SVB’s collapse. It allows banks to take out loans for up to one year secured by government bonds, valued as collateral at full face value. A primary driver of SVB’s failure was the way its holdings of long-term Treasuries had lost value as the Fed had raised interest rates rapidly over the last year (higher rates for new bonds mean that older, low-rate bonds can sell for less). At the end of 2022, the Federal Deposit Insurance Corporation said that banks had lost a combined $620 billion on their holdings. Between March 13 and 15, banks borrowed $11.9 billion from the new lending program. 

7. What does that say about the financial system?

Taken together, the credit extended through the two backstops reflect a banking system that is still fragile. Small and midsize banks lost billions in deposits that moved primarily to larger banks and money-market funds following the banking turmoil. At the same time, the large take-up shows some success in removing the stigma of using the discount window, and indicates that the Fed is having some success performing the vital support it was designed to handle.

More stories like this are available on

©2023 Bloomberg L.P.