Summary of How does the Federal Reserve's discount window work? | Planet Money

00:00:00 - 00:20:00

The Federal Reserve's discount window is explored in this video by NPR's Planet Money. The discount window is a tool used by the Fed to help banks in danger of a bank run, but its stigma has caused banks to avoid borrowing from it. To discourage banks from relying on it, the Fed has raised the price of borrowing and introduced social factors that convey the message that it is for troubled or struggling banks. However, during the COVID recession, the Fed encouraged bigger banks to use the discount window to reduce the stigma associated with it, and the Fed opened a new program that allows banks to use devalued bonds to get money. The Fed has realized that more precise, tailored tools are necessary to meet specific moments effectively.

• 00:00:00 In this section, NPR's Planet Money discusses how the discount window is a tool used by the Federal Reserve to help banks in danger of a bank run. Betsy Duke, formerly CFO of Bank of Virginia Beach, recalls how a lawsuit that made it to the local news where her bank was owed $2 million caused her to worry about her customers fearing the bank might go under. She also recalls a visit from her mom who wanted to withdraw her money from the bank, causing further panic. Betsy called the Federal Reserve in case of a bank run and informed them that she may need to use the discount window. Although the lever was not pulled then, many banks relied on it during the stressful banking moment in March 2020.
• 00:05:00 In this section, the history of the discount window is discussed. The Federal Reserve was created in 1913 to function as a lender of last resort, with the discount window being a cheaper alternative for banks to get loans when they need it. The discount window has been around since the inception of the Fed, and banks in earlier times would go to the teller at the Federal Reserve bank to put up U.S. government bonds or other valuable collateral and get approval for funds in the form of loans. The Fed would then inspect the collateral and determine how much it is worth, discount it a little, and provide the bank with a lower amount. The bank would return the money the next day with interest, and they would get their collateral back.
• 00:10:00 In this section, we learn about how the Federal Reserve (the Fed) wants banks to use the discount window but not rely on it. The Fed initially offered lower rates to encourage banks to borrow from the discount window, but it challenged that behavior over time. To discourage banks from leaning on the Fed, they made the discount window less attractive with rules and added social factors, like the discount window stigma. Banks began to avoid the discount window as it was perceived as something only troubled or struggling banks would use. In response, the Fed raised the price of borrowing to make it more difficult to access.
• 00:15:00 In this section, the Planet Money team delves into the workings of the Federal Reserve's discount window and how it has emerged as a lifeline for banks in times of crisis. The banks' reluctance to use the discount window is attributed to the stigma attached to the perception of borrowing from it. To address this, the Fed has introduced a higher rate for borrowing from the window to convey its message with an economic signal. The recent financial downturn saw the banks borrowing from the discount window, and the Fed opened a new, special program called the bank term funding program, which allows banks to use devalued bonds to get money. The Fed took these bonds at face value, thereby providing a new lifeline to the banks.
• 00:20:00 In this section, the Planet Money team explains that during the COVID recession, a lot of banks needed extra money to get through the economic downturn. The Fed came up with an unconventional solution to address the stigma that comes with borrowing from the discount window. They encouraged the biggest banks to use the discount window so that others can follow suit without the guilt associated with borrowing from the lender of last resort. During the pandemic, when things were so stressful for everyone, the stigma is gone as everyone needed it. However, the Fed has also realized that the discount window, though necessary, is one-size-fits-all and other precise, more tailored tools are necessary to meet the moment more effectively.