Business Definition for: discount window
discount window
place in the Federal Reserve where banks go to borrow money at the
discount rate
. Borrowing from the Fed has been a last resort for banks short of reserves, but in mid-2002, the Fed proposed encouraging direct loans to reduce volatility in the
federal funds rate
. Banks would be expected to use the "window" when Fed funds exceeded the Fed's
target rate
.
discount window
Federal Reserve facility for direct loans to a financial institution with a deficiency in its
reserve account
. The term originated with the practice of sending a bank representative to a reserve bank teller window when a bank needed to borrow money. The discount window provides credit through discounts (actually, rediscounts) of notes and acceptances already accepted, and discounted by a bank, and advances that are collaterized by a bank's holdings of Treasury securities. Today, most Federal Reserve credit is in the form of advances, which are a more convenient way of borrowing. In 2003 the Federal Reserve relaxed its rules on direct loans to financial institutions. Financially sound banks can borrow directly from Federal Reserve Banks even if they have not exhausted other sources of funds.
See also
seasonal credit
,
adjustment credit
,
extended credit
discount window
place in the Federal Reserve where banks go to borrow money at the
discount rate
Borrowing from the Fed is a privilege, not a right, and banks are discouraged from using the privilege except when they are short of
reserves
.
Related Terms:
- credit arrangement, usually a line of credit, allowing corporate borrowers to finance inventory and receivables, purchase supplies, and pay wages during a manufacturing and sales cycle. The borrower has the option of using the line of credit anytime during a specified period, usually two years, and then becomes conventional revolving credit. A line of credit may, however, be less enforceable than a revolving line of credit.
The commitment fees and compensating balances the borrower pays to obtain a standby line are a less expensive way to borrow than a fixed term loan because the borrower draws only what is needed, and can pay down the outstanding balance at any time. - extended credit, supplied by the discount window at a Federal Reserve Bank for periods up to 90 days. Federal Reserve banks make these advances under certain conditions to smaller financial institutions that have a demonstrated seasonal need for funds or have difficulty raising funds from the national money market.
short-term advance by a Federal Reserve Bank, secured by a bank's own promissory note-the most common form of borrowing from a Federal Reserve Bank to meet reserve requirements and support short-term lending.
advance from a Federal Reserve Bank for a longer period than the customary adjustment credit arranged at a discount window. Extended credit is often for periods longer than 30 days, priced at a surcharge above the Fed's discount rate, and it fills the needs of seasonal credit by small banks lacking direct access to money markets and credit to meet the liquidity needs of banks holding long-term fixed rate assets.
Referring Terms:
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