Discount Window and Payment Systems Risk
The Discount Window functions as a safety valve in relieving short-term pressures in reserves markets and supplying liquidity during times of systemic stress. In circumstances where extension of credit can help relieve liquidity strains in the banking system, the Discount Window also helps to assure the basic stability of financial markets more generally. The Discount Window function assists depository institutions in establishing borrowing relationships, ensures that appropriate collateral is in place, and extends credit.
The Board's Payment System Risk policy addresses the risks that payment systems present to the Federal Reserve Banks, the banking system, and other sectors of the economy. It includes governing institutions' use of Federal Reserve intraday credit, also referred to as "daylight overdrafts." A daylight overdraft occurs when an institution is in a negative position at any point during the Fedwire operating day. The ability of the institution to incur daylight overdrafts within policy parameters helps to ensure the smooth, continuous flow of payments throughout the day.
The Federal Reserve pays interest on balances maintained by or on behalf of eligible institutions in master accounts at Federal Reserve Banks. The interest on reserve balances rate, or IORB, is set by the Board of Governors and is an important tool of monetary policy.