Lessons for the Discount Window from the March 2023 Bank Failures

The speed of the bank runs that occurred in the United States in March 2023 took most by surprise. The ensuing policy debate about reform has focused very little on the role of the Federal Reserve's discount window and how it could be made more fit for purpose in mitigating risks to financial stability emanating from the banking system. Making the discount window a more effective financial stability tool will require actions both to reduce the stigma associated with borrowing and improve the operational agility and readiness of the Fed as lender and banks as borrowers. A number of frictions exist that undermine the discount window's effectiveness as a financial stability tool and amplify the stigma associated with discount window borrowing. These frictions may have been tolerable during bank runs that unfolded over a period of days but are problematic in a world where bank runs can transpire in a matter of hours.