Question

1. what is the advantage and disadvantage of a bank borrowing from the discount window (can be about a bank, regulator, Central Bank, economy, customers, etc…) Be explicit.

2. why do regulators want banks to hold cash reserves?

Answer 1

A discount window is a central bank lending facility which is meant for helping commercial banks to manage short term liquidity needs. The discount window is also used for central banks when they act as lender of last resort.

One of the advantages of discount window is that a bank can immediately acquire funds for meeting its urgent requirements. In this way banks can continue to do smooth business and it does not effect the economy. It matters more in times of economic disruptions or during major market collapses.

The main disadvantage of discount window is the higher rate of interest. Discount facility is used as a backup facility to prevent the federal funds rate from rising too far above the target. The discount window cannot be controlled by the Fed; the decision maker is the bank.