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The discount window is the mechanism by which commercial banks can borrow directly from a central bank. (This is usually a last resort.) The name stems from the traditional practice of banks actually displaying assets at a teller window to get loans against them. Today it’s 100% computerized, but the idea is the same – a bank puts up collateral and gets cash in exchange.
There’s a decades-old stigma surrounding access to the discount window. And banks are afraid that getting there would be perceived as a sign of financial weakness, which would cause the very panic they are attempting to prevent.
During the 2008 crisis, the Federal Reserve actually encouraged healthy banks to borrow to help normalize activity and lessen the stigma.
Example: A mid-sized regional bank experiences an unexpected run on one afternoon. Rather than selling assets to a falling market at distressed prices, it goes to the discount window overnight, pledges government bonds as security, and covers the shortfall, buying itself time to deal with the crisis without a fire sale.
