Regulators urge banks to use Fed's discount window for emergency, short-term loans

In the past, banks have shied away from borrowing directly from the central bank

U.S. regulators urged banks on Monday to access the Federal Reserve's discount window if they need emergency, short-term loans as the coronavirus pandemic threatens to disrupt the global economy.

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In a joint statement, the Fed, Federal Deposit Insurance Corporation and Office of the Comptroller of the Currency said banks should use the instrument so they can "continue supporting households and businesses" and "avoid actions that have negative consequences for their customers, such as withdrawing credit during times of market stress."

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The discount window is intended to help banks weather short-term funding crunches. But the U.S. central bank, to discourage banks from leaning too heavily on it, typically charges them a higher interest rate than it would be short-term funding.

On Sunday, among a series of wide-ranging emergency actions, the Fed announced that it would slash the rate of emergency lending at the discount window for banks by 125 basis points to 0.25 percent.

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In the past, banks have shied away from borrowing directly from the central bank, for fear that investors would perceive such a move as signs of impending trouble or a government bailout.

"By providing ready access to funding, the discount window helps depository institutions manage their liquidity risks efficiently and avoid actions that have negative consequences for their customers," the statement said. "Thus, the discount window supports the smooth flow of credit to households and businesses."

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