Why Do Central Banks Have Discount Windows?

Stavros Peristiani () and Joao Santos

No 20110330, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: Though not literally a window any longer, the “discount window” refers to the facilities that central banks, acting as lender of last resort, use to provide liquidity to commercial banks. While the need for a discount window and lender of last resort has been debated, the basic rationale for their existence is that circumstances can arise, such as bank runs and panics, when even fundamentally sound banks cannot raise liquidity on short notice. Massive discount window borrowing in the immediate aftermath of the September 11 terrorist attack on the United States clearly illustrates the importance of a discount window even in a modern economy. In this post, we discuss the classical rationale for the discount window, some debate surrounding it, and the challenges that the “stigma” associated with borrowing at the discount window poses for the effectiveness of the discount window.

Keywords: Discount window; stigma; financial stability; lenders of last resort (search for similar items in EconPapers)
JEL-codes: G2 (search for similar items in EconPapers)
Date: 2011-03-30
New Economics Papers: this item is included in nep-mon
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