What is a 'Discount Window'
A discount window refers to credit facilities in which financial institutions go to borrow funds from the Federal Reserve. These loans, which are priced at the discount rate, are often structured as secured loans to alleviate pressure in reserve markets. It helps to reduce liquidity problems for banks and assists in assuring the basic stability of financial markets.
BREAKING DOWN 'Discount Window'
The Federal Reserve has 3 rates that it charges financial institutions for using the discount window. The primary credit rate is a short-term rate charged for the most financially secure financial institutions. The secondary credit rate is a short rate that is charged for financial institutions that do not qualify for the primary rate. The seasonal credit rate is charged for debt obligations that last up to 9 months.
The Federal Reserve may lower the discount rate and/or make temporary changes to the terms of the loans in order to make the discount window a more attractive source for financial institutions to borrow from in times of financial distress.