Federal Reserve Board research links higher discount window borrowing to low reserve holdings and a more attractive discount rate

The Federal Reserve Board published a research paper by Mark Carlson and Mary-Frances Styczynski examining how banks’ reserve holdings and the relative attractiveness of the Federal Reserve’s discount rate influence borrowing from the discount window. The paper finds that banks borrow more when their reserves are low relative to the amount they prefer to hold and when the discount rate is relatively attractive compared with other interest rates. The analysis is set against recent large fluctuations in the level of reserves in the banking system and in the discount rate relative to other rates. The paper also reports that the magnitude of these effects varies with bank characteristics, including size, Federal Home Loan Bank membership status, and financial condition.