For release on delivery
12:30 p.m. EDT
October 9, 2024

The Fed's Discount Window: 1990 to the Present

Remarks by
Philip N. Jefferson
Vice Chair
Board of Governors of the Federal Reserve System
at the
Charlotte Economics Club

Charlotte, North Carolina

October 9, 2024

Thank you, Steve, for that kind introduction and for the opportunity to talk to this
group today. !

Let me start by saying that I am saddened by the tragic loss of life, destruction,
and damage resulting from Hurricane Helene in North Carolina, and throughout this
region. My thoughts are with the people and communities affected. For our part, the
Federal Reserve and other federal and state financial regulatory agencies are working
with banks and credit unions in the affected area to help make sure they can continue to
meet the financial services needs of their communities.

Yesterday I shared my historical perspective on the discount window at Davidson
College." In 1913, when the Federal Reserve was established, the discount window was
the main tool it used to provide the nation with a safer, more flexible, and more stable
monetary and financial system. More than 110 years later, the discount window
continues to play an important role in supporting the liquidity and stability of the banking
system, and the effective implementation of monetary policy.

Today I would like to discuss with you how the discount window has evolved in
the 21st century, including recent steps the Federal Reserve Board has taken to solicit
feedback from the public on discount window operations. Before I address our most
recent efforts, however, I will review some important episodes in discount window
history that brought us to where we are today.

First, I will recount briefly events in the 1980s and early 1990s that provide

important context for the reappraisal of the discount window in the early 2000s. Second,

' The views expressed here are my own and are not necessarily those of my colleagues on the Federal
Reserve Board or the Federal Open Market Committee.
? See Jefferson (2024).

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I will summarize revisions to the discount window that the Fed made in 2003 and some
additional changes made since then. Third, I will describe efforts that the Fed has taken
to ensure that the discount window remains effective today, including the request for
information that the Board recently issued on operational aspects of the discount window
and intraday credit. After completing my discussion of the discount window, I will
conclude with my outlook for the U.S. economy.
Events before the 2003 Discount Window Revisions

I would like to pick up today where I left off yesterday in my speech at Davidson
College: the 1980s and early 1990s. This was a period of widespread problems in the
commercial banking sector. Troubled institutions borrowed from the discount window
for extended periods of time as the Federal Deposit Insurance Corporation (FDIC) sought
to find merger partners or otherwise manage the closure of these institutions. As a result,
the discount window became associated strongly with lending to troubled institutions.
Healthy banks' reluctance to borrow from the discount window increased. The greater
reluctance to borrow from the discount window made it less effective both as a monetary
policy tool and as a crisis-fighting tool.* This led to a reassessment of the discount

window in the early 2000s and to eventual revisions implemented in 2003.

3 For more details about this period, see Clouse (1994). In response to the wave of depository institution
failures, Congress placed legal limitations on Federal Reserve lending to troubled institutions. Specifically,
section 142 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) amended
section 10B of the Federal Reserve Act to place restraints on discount window lending to undercapitalized
and critically undercapitalized insured depository institutions. FDICIA also imposed liability on the Board
of Governors for excess losses incurred by the FDIC that are attributable to lending beyond those limits.
The provisions of FDICIA were intended to reduce moral hazard in the banking system and limit taxpayer
losses.

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A Reassessment of the Discount Window in the Early 2000s

The key challenge in the reassessment of the discount window was to establish a
lending program that would not only operate effectively and support monetary policy
implementation, but also mitigate moral hazard and provide sufficient controls to
minimize risk to Reserve Banks and, ultimately, to American taxpayers. After the
reassessment, the Fed implemented several changes aimed to achieve the right balance.

The Board replaced the adjustment credit program, which was extended at a
below-market rate, with a new type of discount window credit called primary credit. This
new type of discount window credit became effective in 2003. It is available as a
backup source of liquidity to depository institutions in generally sound financial
condition at an above-market rate. Making the discount rate a penalty rate is more
consistent with the long-standing practice of other major central banks. This feature was
intended to reduce the need for administrative pressures based on Reserve Bank staff
judgment of inappropriate usage when the discount rate was below market rates.
Although those measures effectively limited usage that was deemed inappropriate at the
time, they also presented communication challenges regarding when it was appropriate to
use the discount window and perpetuated the perception that the Fed discouraged its use.

Primary credit is a "no questions asked" facility in which eligible depository
institutions are no longer required to have exhausted other sources of funding or be
subject to restrictions on the use of the borrowed funds. The Fed initially set the primary

credit rate 100 basis points above the target federal funds rate.> Since March 2020, the

4 For more details, see the October 31, 2002, Federal Reserve press release (Board of Governors, 2002b)
and the final rule implementing the changes (Board of Governors, 2002a).

5 In 2003, when primary credit was implemented, there was a single federal funds target rate. The Federal
Open Market Committee adopted a federal funds target range on December 16, 2008.

4.

Fed has set the primary credit rate at a level equal to the top of the target range for the
federal funds rate.°

At the same time primary credit was established, another new program, called
secondary credit, replaced the extended credit program. Secondary credit is available to
depository institutions that are not eligible for primary credit. It was initially available at
an interest rate 50 basis points higher than the primary credit rate, which is the spread in
effect today. In contrast to primary credit, extensions under secondary credit are subject
to higher collateral discounts and may involve ongoing oversight on the use of funds
obtained under the program, reflecting the less-sound condition of secondary credit
borrowers. Typically, Reserve Banks review a depository institution's plan to repay the
loan and return to market sources of funding.

This two-tiered structure of providing the no-questions-asked primary credit
program for healthy depository institutions and the secondary credit program for less-
than-healthy depository institutions was designed primarily to instill public confidence in
the health of institutions borrowing from the primary credit program and to reduce the
reluctance of healthy depository institutions to borrow.' In addition, having two separate
facilities would reinforce the notion that healthy and troubled depository institutions alike
should regard borrowing from the Fed as an option in the event of a need for additional

funds.

6 For details on the change to the rate spread announced in March 2020, see the press release (Board of
Governors, 2020). As will be discussed in greater detail later, before 2020, the spread between the primary
credit rate and the target federal funds rate (or top of the target range) had changed a few times to address
economic conditions during the 2007-09 financial crisis and the subsequent recovery.

7 This design feature also would help Reserve Banks manage risk more easily by establishing a
standardized approach and risk controls when lending through a facility reserved for troubled depository
institutions. Loans to troubled depository institutions entail more risk to the lending Reserve Bank, and
depository institutions that are undercapitalized or critically undercapitalized are subject to lending
limitations under FDICIA.

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In the early years of the switch to the new facilities, there were signs that healthy
depository institutions became more willing to borrow from the discount window. For
example, some research found that after the 2003 discount window revisions, banks
borrowed more from the discount window when the federal funds rate spiked than they
had previously.* This finding suggests that the redesign of the discount window was
effective in reducing banks' reluctance to borrow. As a result, the discount window may
have been more effective in placing a ceiling on short-term funding rates, aiding the
implementation of monetary policy, and serving as a liquidity tool when needed.

Nevertheless, it is important to acknowledge that it is difficult to measure
reluctance to borrow from the discount window. When the interest rate on primary credit
is above the target federal funds rate and the federal funds rate is close to its target, the
aggregate volume of primary credit is expected to be low. In other words, a low average
level of discount window borrowing does not necessarily mean that there is a reluctance
to borrow; instead, it could simply reflect a situation in which depository institutions do
not currently need to borrow. In addition, when there is an abundance of liquidity in the
banking system, as is the case in the current ample-reserves monetary policy regime,
depository institutions may have less need to obtain additional liquidity via the discount
window. Again, this does not necessarily mean that there is a reluctance to borrow.
Conversely, the presence of discount window borrowing does not necessarily reflect the
absence of a reluctance to borrow. It could be the case that, although aggregate usage
increases, there are still some depository institutions that are willing to pay well above

the primary credit rate even when they could have borrowed readily from the discount

8 See Artu¢ and Demiralp (2010).

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window. For these reasons, it is important that we complement data with market
outreach information to assess the effectiveness of the discount window.
Changes and Challenges since the Introduction of Primary and Secondary Credit

Primary and secondary credit exist today, but some changes have been made to
primary credit since its inception. For example, although the discount window was used
extensively and played an important role in the emergency measures taken during the
financial crisis of 2007-09, some depository institutions during this period still were
willing to borrow funds from the market at rates above the discount rate." This suggested
that there was a reluctance to borrow before the crisis, and that reluctance appeared to
grow over the course of the crisis. To promote the restoration of orderly conditions in
financial markets and provide depository institutions with greater assurance about the
cost and availability of funding, the Board approved temporary changes to its primary
credit discount window facility during the crisis.!° In addition, in late 2007, the Board
established the Term Auction Facility (TAF).!!

Concerns about lending to troubled depository institutions reemerged after the

2007-09 financial crisis. In the Dodd-Frank Wall Street Reform and Consumer

° See Bernanke (2009a) and Madigan (2009) for a retrospective that elaborates on some of the emergency
measures taken during the 2007-09 financial crisis and the reasoning for discount window rate changes
during the financial crisis.

'0 Throughout this crisis, the Board approved numerous reductions in the primary credit rate and narrowed
the spread between the primary credit rate and the target federal funds rate twice. With the narrowing of
the spread in August 2007 from 100 basis points to 50 basis points and in March 2008 to 25 basis points,
the Board announced that the maximum term for primary credit loans would be extended, first to 30 days
and then to 90 days, respectively. As economic conditions improved, in 2010, the Board increased the
spread between the primary credit rate and the target federal funds rate to 50 basis points and shortened the
maximum term for primary credit loans to overnight.

"I The TAF provided fixed quantities of term credit to depository institutions through an auction
mechanism and seemed to have largely addressed banks' concern that borrowing from the Federal Reserve
would imply weakness. According to Bernanke (2009b, paragraph 7), this was "partly because the sizable
number of borrowers provides a greater assurance of anonymity, and possibly also because the three-day
period between the auction and auction settlement suggests that the facility's users are not using it to meet
acute funding needs on a particular day."

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Protection Act, which was enacted in 2010, Congress required the Fed to publish detailed
individual institution borrowing data with a two-year lag.!* This action was intended to
enhance the transparency and accountability of Federal Reserve lending while still
preserving a measure of confidentiality to avoid discouraging depository institutions from
borrowing.

More recently, in March 2020, the Fed announced changes to the provision of
primary credit that were intended to encourage depository institutions to use the discount
window to meet demands for credit from households and businesses in connection with
the COVID-19 pandemic. These changes included setting the primary credit rate at a
level equal to the top of the federal funds target range-a step that enhanced the ability of
the discount window to support trading within the Federal Open Market Committee's
(FOMC) target range for the federal funds rate-and communicating the terms of
borrowing as 90 days, prepayable and renewable on a daily basis. To further encourage
depository institutions to use the discount window, the Fed also made changes to its
reporting of Reserve Bank-level aggregate weekly discount window borrowing. It
consolidated amounts previously reported as "loans," which include discount window
borrowing, into a broader category of assets.'? The changes made in 2020 remain in

effect.

2 See section 1103 of the Dodd-Frank Act, which amended section 11 of the Federal Reserve Act.

'3 The Board's H.4.1 statistical release, "Factors Affecting Reserve Balances of Depository Institutions and
Condition Statement of Federal Reserve Banks," is published weekly
(https://www.federalreserve.gov/releases/h41). It presents a balance sheet for each Federal Reserve Bank, a
consolidated balance sheet for all 12 Reserve Banks, an associated statement that lists the factors affecting
reserve balances of depository institutions, and several other tables presenting information on the assets,
liabilities, and commitments of the Federal Reserve Banks. For additional details on the consolidation of
"loans" into a broader category of assets, see the March 19, 2020, H.4.1 announcement, available on the
Board's website at https://www.federalreserve.gov/releases/h4 1/202003 19.

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During and after the spring 2023 stress events, the discount window again played
an important role in supporting both monetary policy and financial stability. Depository
institutions that came under severe stress turned to the discount window. The discount
window also served an important role in providing ready access to funding, especially for
depository institutions experiencing spillovers from the bank failures. To further ensure
that depository institutions had the ability to meet the needs of all their depositors, the
Board announced the creation of a new emergency program, the Bank Term Funding
Program (BTFP). Although the BTFP was established pursuant to the Board's
emergency lending authority in section 13(3) of the Federal Reserve Act, the BTFP used
the discount window infrastructure to lend to eligible depository institution borrowers. '4
By relying on the existing discount window infrastructure, the BTFP was able to begin
operating right away. The program ceased extending new loans on March 11, 2024, as
scheduled.

Today the discount window continues to be an effective tool, but it is important to
acknowledge that economic and banking conditions continue to evolve. Since the 2003
discount window reassessment, we have seen an increased focus on liquidity in banking
regulation, including the advent of quantitative liquidity requirements for large banking
organizations; technological changes in the banking system; a general trend toward faster

and 24-7-365 payment systems; changes in the composition and posture of Federal Home

'4 As with the discount window, an eligible institution participated in the BTFP through its local Reserve
Bank. The legal agreements and process for pledging securities in the BTFP also relied on those used in
discount window lending. Nevertheless, the BTFP differed from the discount window in various ways,
including the term of lending, scope of eligible collateral, collateral valuation, and interest rate. For more
information on the differences between the BTFP and the discount window, see the response to question
A.3 in Board of Governors (2024a, p. 3). For additional details on the BTFP, see the March 12, 2023, press
release (Board of Governors, 2023).

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Loan Bank lending; and the move to an ample-reserves monetary policy implementation
regime.

In light of these developments, the Federal Reserve System has taken important
steps to ensure that the discount window performs its functions successfully in the 21st-
century economy. For example, last year the Board, along with the other federal banking
agencies and the National Credit Union Administration, issued guidance on contingency
funding plans that encouraged depository institutions to be ready to borrow from the
discount window.'> This includes taking steps to establish borrowing relationships with
the Federal Reserve, such as providing certain legal documentation and ensuring that
collateral to secure loans is ready to pledge. In connection with interagency initiatives,
Reserve Banks have conducted outreach to depository institutions and made efforts to
guide them in using the discount window.

Data suggest that this encouragement is working. By the end of 2023, 3,900
banks, or roughly 80 percent of all banks, had completed the legal documentation
required to borrow from the discount window.'® Of those, nearly 2,000 banks had
pledged collateral, with an aggregate lendable value of over $2.6 trillion after applying
appropriate discounts. These figures are notably above their levels at the end of 2021 and
2022. Although I am pleased to see the improvements in discount window readiness
statistics, continued outreach is still important. To that effect, this summer, Federal

Reserve Banks hosted an Ask the Fed® session to discuss the purpose of the discount

'S See Board of Governors and others (2023).
'6 The statistics in this paragraph are available on the Board's website at
https://www.federalreserve.gov/monetarypolicy/discount-window-readiness.htm.

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window, its facilities, and recommendations for depository institutions on how to prepare
to borrow from the Fed.!7

Additionally, the Federal Reserve System has made important investments to
enhance the technology that supports discount window activities. Earlier this year, the
System launched Discount Window Direct, which is an online portal for depository
institutions to request and prepay loans as well as securely message their local Reserve
Bank.!® Discount Window Direct generally is accessible 24 hours a day. We are actively
encouraging the use of Discount Window Direct.
Seeking Feedback on the Discount Window

To complement our efforts to enhance discount window operations, the Federal
Reserve Board recently announced that it is collecting feedback from the public on
operational frictions associated with the discount window and intraday credit through the
issuance of a request for information. As some of you may know, a request for
information is a formal document through which a government agency solicits feedback.
Members of the public can submit comments in response to the request for information
until December 9, 2024.!9

The Board requests input on various discount window and intraday credit
operational practices, such as the process for requesting, receiving, and repaying discount
window loans as well as Reserve Bank discount window and intraday credit

communications practices. Through the request for information, the Board hopes to gain

'7 More information on Ask the Fed is available on the Federal Reserve Bank of St. Louis's website at
https://bsr.stlouisfed.org/askthefed/Auth/Logon.

'8 Additional details on Discount Window Direct can be found on the Federal Reserve Bank Services
website at https://www. frbservices.org/central-bank/lending-central.

'9 See the information on discount window operations in section II.A of Board of Governors (2024b).

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further insight into the operational aspects that are the most costly or burdensome for
depository institutions. This will help the Fed consider further improvements to promote
efficiency and reduce burden on depository institutions. Ultimately, the Fed's goal is to
build on the current discount window operations and processes so that the discount
window will continue to provide ready access to funding against a wide range of
collateral in the future. I encourage members of the public to submit comments on the
request for information, and I look forward to considering the feedback that we receive.
Economic Outlook

Before concluding, let me share with you a summary of my outlook for the U.S.
economy, as I did yesterday with the audience at Davidson. Economic activity continues
to grow at a solid pace. Inflation has eased substantially. The labor market has cooled
from its formerly overheated state.

Personal consumption expenditures (PCE) prices rose 2.2 percent over the
12 months ending in August, well down from 6.5 percent two years earlier. Excluding
the volatile food and energy categories, core PCE prices rose 2.7 percent, compared with
5.2 percent two years earlier. Our restrictive monetary policy stance played a role in
restraining demand and in keeping longer-term inflation expectations well anchored, as
reflected in a broad range of inflation surveys of households, businesses, and forecasters,
as well as measures from financial markets. Inflation is now much closer to the FOMC's
2 percent objective. I expect that we will continue to make progress toward that goal.

While, overall, the economy continues to grow at a solid pace, the labor market
has modestly cooled. Employers added an average of 186,000 jobs per month during

July through September, a slower pace than seen early this year. The unemployment rate

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now stands at 4.1 percent, up from 3.8 percent in September 2023. Meanwhile, job
openings declined by about 4 million since their peak in March 2022. The good news is
that the rise in unemployment has been limited and gradual, and the level of
unemployment remains historically low. Even so, the cooling in the labor market is
noticeable.

Congress mandated the Fed to pursue maximum employment and price stability.
The balance of risks to our two mandates has changed-as risks to inflation have
diminished and risks to employment have risen, these risks have been brought roughly
into balance. The FOMC has gained greater confidence that inflation is moving
sustainably toward our 2 percent goal. To maintain the strength of the labor market, my
FOMC colleagues and I recalibrated our policy stance last month, lowering our policy
interest rate by 1/2 percentage point.

Looking ahead, I will carefully watch incoming data, the evolving outlook, and
the balance of risks when considering additional adjustments to the federal funds target
range, our primary tool for adjusting the stance of monetary policy. My approach to
monetary policymaking is to make decisions meeting by meeting. As the economy
evolves, I will continue to update my thinking about policy to best promote maximum
employment and price stability.

Thank you.

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References

Artug, Erhan, and Selva Demiralp (2010). "Provision of Liquidity through the Primary
Credit Facility during the Financial Crisis: A Structural Analysis," Federal
Reserve Bank of New York, Economic Policy Review, vol. 16 (August), p. 43-53.

Bernanke, Ben S. (2009a). "The Federal Reserve's Balance Sheet," speech delivered at
the Federal Reserve Bank of Richmond 2009 Credit Markets Symposium,
Charlotte, N.C., April 3,
https://www.federalreserve.gov/newsevents/speech/bernanke20090403a.htm.

(2009b). "The Federal Reserve's Balance Sheet: An Update," speech delivered
at the Federal Reserve Board Conference on Key Developments in Monetary
Policy, Washington, October 8,
https://www.federalreserve.gov/newsevents/speech/bernanke2009 1008a.htm.

Board of Governors of the Federal Reserve System (2002a). "Extensions of Credit by
Federal Reserve Banks; Reserve Requirements of Depository Institutions," final
tule, technical amendment (Docket Nos. R-1123 and R-1134), Federal Register,
vol. 67 (November 7), pp. 67777-87,
https://www. federalregister.gov/documents/2002/1 1/07/02-28 1 15/extensions-of-
credit-by-federal-reserve-banks-reserve-requirements-of-depository-institutions.

(2002b). "Publication of Final Rule Amending Regulation A (Extensions of
Credit by Federal Reserve Banks)," press release, October 31,
https://www.federalreserve. gov/boarddocs/press/bcreg/2002/200210312.

(2020). "Federal Reserve Actions to Support the Flow of Credit to Households and
Businesses," press release, March 15,
https://www.federalreserve.gov/newsevents/pressreleases/monetary202003 15b.htm.

(2023). "Federal Reserve Board Announces It Will Make Available Additional
Funding to Eligible Depository Institutions to Help Assure Banks Have the Ability
to Meet the Needs of All Their Depositors," press release, March 12,
https://www.federalreserve.gov/newsevents/pressreleases/monetary202303 12a.htm.

--- (2024a). "Bank Term Funding Program: Frequently Asked Questions," updated
January 24, https://www.federalreserve.gov/financial-stability/files/bank-term-
funding-program-faqs. pdf.

- (2024b). "Request for Information and Comment on Operational Aspects of
Federal Reserve Bank Extensions of Discount Window and Intraday Credit,"
request for information and comment (Docket No. OP-1838), Federal Register,
vol. 89 (September 10), pp. 73415-18,
https://www. federalregister.gov/documents/2024/09/10/2024-204 I 8/request-for-
information-and-comment-on-operational-aspects-of-federal-reserve-bank-
extensions-of#:~:text=A.-

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,Discount%20Window%20Operations, institution"%20must%20take%20several%2
Osteps.

Board of Governors of the Federal Reserve System, Federal Deposit Insurance
Corporation, National Credit Union Administration, and Office of the
Comptroller of the Currency (2023). "Agencies Update Guidance on Liquidity
Risks and Contingency Planning," joint press release, July 28,
https://www.federalreserve.gov/newsevents/pressreleases/bcreg20230728a.htm.

Clouse, James A. (1994). "Recent Developments in Discount Window Policy," Federal
Reserve Bulletin, vol. 80 (November), pp. 965-77,
https://www.federalreserve.gov/monetarypolicy/1194lead.pdf.

Jefferson, Philip N. (2024). "A History of the Fed's Discount Window: 1913-2000,"
speech delivered at Davidson College, Davidson, N.C., October 8,
https://www.federalreserve.gov/newsevents/speech/jefferson20241008a.htm.

Madigan, Brian F. (2009). "Bagehot's Dictum in Practice: Formulating and
Implementing Policies to Combat the Financial Crisis," speech delivered at the
Federal Reserve Bank of Kansas City's Annual Economic Symposium, Jackson
Hole, Wyo., August 21,
https://www.federalreserve.gov/newsevents/speech/madigan20090821a.htm.