Key points
- Stigma attached to using it (signals weakness).
- Discount rate typically above fed funds rate.
- Backup source of liquidity for banks.
Example
A bank facing sudden deposit outflows might borrow overnight at the primary credit rate to meet withdrawals without selling securities at a loss.
In history
Usage spiked in March 2023 during US regional bank stress, signaling funding pressure even with abundant reserves.
Related terms