Uploaded August 2019 | Updated September 2026, 1 hour ago
What do banks do when they're unable to secure funding from other lending institutions? Well, among other things, they can resort to the Federal Reserve's discount rate.
The definition of the (federal) discount rate is actually fairly straightforward: it's the rate at which commercial banks can borrow directly from the central bank of the United States, the Federal Reserve.
As explained in this video, however, the discount rate is hardly popular among banks for two main reasons. On the other hand, due to the fact that in an ideal scenario, banks would simply lend/borrow among one another at a rate that's lower than the discount rate. On the other hand, markets tend to perceive the idea of resorting to the discount rate a sign of weakness, and the implications of that should be obvious.
Therefore, this video explains why the discount rate is a measure of last resort but preferably not more: useful to have around as an option if there are no other solutions (for example, due to a crisis which leads to a shortage of capital in the banking system) but most definitely not popular.
What do banks do when they're unable to secure funding from other lending institutions? Well, among other things, they can resort to the Federal Reserve's discount rate.
The definition of the (federal) discount rate is actually fairly straightforward: it's the rate at which commercial banks can borrow directly from the central bank of the United States, the Federal Reserve.
As explained in this video, however, the discount rate is hardly popular among banks for two main reasons. On the other hand, due to the fact that in an ideal scenario, banks would simply lend/borrow among one another at a rate that's lower than the discount rate. On the other hand, markets tend to perceive the idea of resorting to the discount rate a sign of weakness, and the implications of that should be obvious.
Therefore, this video explains why the discount rate is a measure of last resort but preferably not more: useful to have around as an option if there are no other solutions (for example, due to a crisis which leads to a shortage of capital in the banking system) but most definitely not popular.
