Board of Governors of the Federal Reserve System

February 26, 2025

Central bank liquidity facilities around the world

David Arseneau, Mark Carlson, Kathryn Chen, Matt Darst, Dylan Kirkeeng, Elizabeth Klee, Matt Malloy, Benjamin Malin, Emilie O'Malley, Friederike Niepmann, Mary-Frances Styczynski, Melissa Vanouse, and Alexandros P. Vardoulakis

A core task of central banks is to provide liquidity to banks, with the goal of facilitating monetary policy implementation, ensuring the smooth functioning of the payment system, and promoting financial stability. While central banks around the world pursue these goals, the design of liquidity facilities differs across countries. This note provides an overview of liquidity facilities around the world that resemble the Federal Reserve's discount window as well as intraday credit, comparing and contrasting setups in different countries.

The discount window and intraday credit in the United States

The Federal Reserve's discount window has three typical lending programs: primary credit, secondary credit and seasonal credit. The most broadly used program is primary credit, which is available to depository institutions that are in generally sound financial condition and granted on a "no questions asked" basis. Currently, the primary-credit rate is set at the top of the target range for the federal funds rate. Depository institutions may borrow for a term of up to 90 days. A Reserve Bank may also extend secondary credit to a depository institution that is not eligible for primary credit. Secondary credit loans are made on a very short-term basis—usually overnight and at rates above the primary credit rate.¹ By providing liquidity to banks on demand, the discount window could, in principle, set a ceiling on the overnight interbank rate, thereby helping with monetary policy implementation, while also promoting financial stability.

In addition to the discount window, the Federal Reserve also offers depository institutions intraday credit during operating hours to support the smooth functioning of the payment system. Collateralized intraday credit is provided at no cost, and uncollateralized intraday credit is provided for a fee.

Mapping central bank liquidity facilities by function

This note focuses on programs around the world that are most like the Fed's discount window: Standing facilities that provide short-term liquidity on demand to approved counterparties of the central bank against a broad range of collateral. This note also addresses intraday credit provision, but largely does not cover liquidity provision similar to that under Section 14 of the Federal Reserve Act in the U.S. context (i.e., providing liquidity under open-market operation (OMO) authority, such as permanent or temporary OMOs and the Standing Repo Facility), or under Section 13(3) ("unusual and exigent circumstances" emergency facilities).² In terms of foreign countries considered, the note provides details for facilities at eight foreign central banks (FCBs): Reserve Bank of Australia (RBA), Banco Central do Brazil (BCB), Bank of Canada (BoC), European Central Bank (ECB), Bank of Japan (BoJ), Banco de México (BdM), Riksbank, and Bank of England (BoE).

Types of liquidity facilities
Discount-window like facilities exist to satisfy liquidity demand by financial institutions arising from the management of payment flows, unexpected liquidity shortages, or more severe funding pressures. We distinguish four facility types with different functions:

1. Intraday liquidity provision to provide temporary credit to balance timing differences of intraday flows and support the smooth functioning of the payment system.
2. Business-as-usual overnight liquidity provision (BAUL) to insure against interbank market misallocation of liquidity at the end of the day. Like intraday liquidity provision, this function is for business-as-usual (BAU) needs. This facility often helps control interbank rates, playing a role in monetary policy implementation.
3. Stress-related temporary liquidity provision (STL) to insure against unexpected, but short-lived, liquidity shortages and to address self-fulfilling bank runs. This facility type is for situations when institutions face liquidity outflows due to temporary idiosyncratic stress or systemic funding pressures but are deemed solvent without the need for additional interventions.
4. Emergency Liquidity Assistance (ELA) to provide liquidity support to institutions that face more persistent liquidity shortages, which could put their viability at risk and raise broader financial stability concerns.³

Figure 1 classifies foreign central bank liquidity facilities that share similarities with the functions of the Fed's discount window and intraday credit programs into these four types and presents the U.S. facilities across a similar spectrum for comparison. On the left are facilities with functions to satisfy BAUL needs, while facilities further to the right provide liquidity under increasing stress.

Figure 1. Functions of central bank facilities

High-level takeaways from foreign central bank liquidity facilities
First, all FCBs provide intraday liquidity and have some form of ELA.⁴ Intraday liquidity is provided separately from other forms of liquidity. ELA is also provided through a separate program. ELA may comprise or be separate from liquidity provision during resolution, which may fall under the responsibility of a separate authority, with some FCBs facing legal restrictions regarding lending to insolvent institutions.⁵

Second, the design of the facilities in the intermediate space differs considerably across foreign countries. Specifically, some central banks attempt to separate overnight liquidity provision for BAU purposes from liquidity provision to address temporary stress by offering separate facilities with different pricing, term, and/or accepted collateral.⁶ The BCB, BoC, BoJ, BdM and BoE have a medium-term lending facility (30 days to 3 months) in addition to an overnight facility. Other central banks do not make a distinction. Specifically, the RBA and ECB have only one facility for BAUL/STL purposes, which is overnight.^7,8

Of note, through primary and secondary credit combined, the U.S. discount window serves more functions than the facilities in other countries. Primary credit is associated with BAUL and STL, while secondary credit can be seen as providing mainly STL and ELA.⁹

Finally, foreign central banks differ in their approach to outstanding negative account balances at the end of the business day or "overnight overdrafts" (not shown in Figure 1). In the U.S., overnight overdrafts are actively discouraged and charged a penalty rate.¹⁰ The BoJ and the BdM have similar overnight overdraft policies whose use is discouraged. Most other central banks instead generally convert outstanding negative account balances at the end of the business day into loans from their BAUL facilities.

Common characteristics of liquidity facilities

Table 1 captures the characteristics of the different types of foreign central bank facilities. While the exact terms of the various liquidity facilities vary significantly across foreign central banks, there are a few typical features.

Table 1: Characteristics of foreign liquidity facilities

When moving from business as usual to ELA, overall: (i) the accepted collateral becomes broader, (ii) pricing becomes more expensive, (iii) the tenor increases, and (iv) lending becomes more discretionary.

Intraday credit is collateralized in foreign countries, often extended against high-quality collateral and carries zero interest.¹¹ BAUL is provided in many countries against the same type of collateral that is accepted for intraday credit, while the interest rate ranges from 10-35bp above the overnight interbank rate target. Liquidity is extended fairly automatically with no questions asked.

STL facilities typically accept broader collateral than intraday credit and BAUL facilities and have longer tenors of up to 3 months. Foreign central banks do not disclose individual transactions conducted under the BAUL and STL facilities, publishing aggregate usage if at all and often only with a lag.

For ELA, the type of collateral accepted at this facility can be quite different across central banks, with some central banks not requiring collateral for ELA. In cases where no collateral is required, the fiscal authority is involved. ELA loans have a tenor of up to one year. The interest rate set on loans and haircuts applied are fairly flexible and less transparent than for other facilities, reflecting the larger discretion of central banks in extending longer-term loans, with decisions taken on a case-by-case basis.¹²

The primary and secondary credit programs in the U.S. differ from the typical features of foreign liquidity facilities in a few respects. Most notably, U.S. banks access liquidity facilities based on their supervisory rating, capital position, and other factors, while in foreign countries banks may also select a liquidity facility based on terms such as pricing and collateral. Additionally, the maturity shortens as banks move from primary credit to secondary credit going from 90 days to overnight. Finally, the Federal Reserve Act requires the Federal Reserve to disclose details about individual transactions under the discount window with a two-year lag.¹³

Same trade-offs, different design choices

Differing design choices by central banks are, in part, explained by different legal and institutional constraints, monetary policy frameworks, or the structure of the financial system. For example, in the United States, Federal Home Loan Banks play a key role in providing BAUL/STL liquidity to banks.

These differences notwithstanding, all central banks have essentially the same goals of supporting monetary policy implementation, while promoting financial stability and the smooth functioning of the payment system. Similarly, in designing liquidity facilities, central banks all face the same difficult task of meeting liquidity provision goals while, at the same time, limiting the undesired consequences. This trade-off is typically described as the trade-off between stigma and moral hazard.

Stigma captures the idea that an individual bank might be hesitant to borrow from a liquidity facility because doing so could send a negative signal about its financial condition to others—counterparties, competitors, regulators, market participants, and the public more generally.¹⁴ If stigma discourages use, the effectiveness of a liquidity facility can be undermined. Moral hazard captures the idea that access to public liquidity can incentivize financial institutions to take on excessive risk. If banks and market participants assume that the central bank will provide liquidity in adverse situations, banks may take on more liquidity risk and providers of wholesale funding will not demand higher compensation for the risks taken on by the bank.

Figure 2 shows a simplified presentation of this trade-off. Central banks want to minimize both stigma and moral hazard. However, central banks cannot choose any combination of stigma and moral hazard. Instead, they are bound by how the incentives of market participants shape the tradeoff between stigma and moral hazard, depicted by the frontier in the figure. Central banks can adjust the terms of a facility, including the interest rate, eligible collateral, haircuts, and disclosure practices regarding its use to choose a point on the frontier that best serves the intended purpose. For example, borrowing from a backstop facility may be expensive to limit usage and minimize moral hazard, but at the risk of potentially inducing stigma. To reduce stigma, disclosures may be limited. Alternatively, a BAU facility may be calibrated so that the terms are attractive, and the facility is used more frequently, lowering the stigma of the facility but making moral hazard worse. To compensate for the increased moral hazard, the facility may only accept high-quality collateral, or access may be restricted to banks in sound condition.

Figure 2. Trade-off Frontier

The differences in the designs of liquidity facilities reflect strategies to deal with this core trade-off with central banks choosing a combination of interest rate, collateral requirements, collateral haircuts etc. that best meets their goals while minimizing undesired consequences. Having differentiated facilities for distinct purposes may help alleviate the moral hazard-stigma tradeoff.

Conclusions

Liquidity facilities differ considerably across countries, reflecting differences in legal and institutional constraints, monetary policy implementation frameworks, and financial system structures. Still, central banks have similar goals and face similar challenges, resulting in a few key commonalities in facility designs among foreign central banks. While the goals will remain the same, the environment is changing. Technology is advancing, monetary policy implementation frameworks are reforming, liquidity management at banks is progressing. As a result, central bank liquidity facilities around the world may evolve along with these developments.

Appendix

Details on foreign countries' facilities that serve U.S. discount-window functions¹⁵

Reserve Bank of Australia

Brazil (Banco Central do Brasil)

Canada (Bank of Canada)

Euro Area (European Central Bank)

Japan (Bank of Japan)

Mexico (Banco de México)

Sweden (Riksbank)

United Kingdom (Bank of England)