What it is
Commercial banks and other depository institutions can use the discount window to obtain loans, usually collateralized, at a rate known as the discount rate. This facility serves as a backstop source of funding, helping banks manage unexpected cash flow demands and maintain adequate reserve levels. It is a key tool for the Federal Reserve to provide liquidity to the banking system.
While banks prefer to borrow from each other in the federal funds market, using the discount window signals a bank's urgent need for funds and can sometimes carry a stigma. However, the Fed encourages its use during times of stress to prevent broader financial instability. Its usage levels can indicate the health and liquidity of the banking system.
Why it matters
It's a critical tool for the Fed to inject liquidity into the banking system, preventing bank runs and systemic financial crises.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice