If a bank is unable to borrow reserves from the Fed funds market to meet its reserve requirement, where else might it borrow reserves? What is the name of the rate it pays to borrow these reserves?

Question

Social Studies

Mylee Avila

1 September, 15:08

If a bank is unable to borrow reserves from the Fed funds market to meet its reserve requirement, where else might it borrow reserves? What is the name of the rate it pays to borrow these reserves?

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Mathew Hester · Answer 1

Banks can borrow from the federal reserve system at discount rate.

Explanation:

The fed provides the fund for banks to increase their reserves through open market operations. The fed purchases government securities or bonds to increase reserves with banks.

If a bank is not able to borrow funds for its reserves from the Fed funds market, then, in that case, it can borrow from the federal reserve system at a discount window.

The rate at which it has pay back this loan is called the discount rate. This rate is used as a tool by the feds to control the money supply. The discount rate serves as a tool for monetary policy.