Discount Window

A discount window is like a 24/7 drive-thru for commercial banks that need a quick order of liquidity (not of the Coca-Cola variety) from the central bank. In the U.S., the Federal Reserve (i.e. “the Fed”) and the regional central banks have discount windows, which give out short-term loans at the “discount rate” (the special rate for commercial banks).

Why would a big bank be in need of such a handout? A lot of money goes in-and-out of banks, and sometimes, they get short on the cash they’re supposed to have on hand. That’s why the loans are very short-term (most of the time just overnight).

During the 2008 financial crisis, the Fed’s discount window was a Hail Mary to bringing some stability. The lending periods were extended to three months, the discount rate was slashed like a sale at Walmart, and over $400 billion was borrowed by banks, compared to only $3.4 billion borrowed for 2001’s fall recession. Yeah, it was that bad.