Access to the Federal Reserve Bank’s Discount Window

Basics

CDFIs require reliable, low‑cost sources of cash to meet the growing demand for mission‑focused lending. Most CDFI loan funds gain this liquidity from their own balance sheets and from banks, foundations, government agencies, and other investors. This can impose on CDFIs capital constraints that limit their ability to scale lending and weather economic slumps.

One way to reduce these vulnerabilities is to provide CDFI loan funds with access the Federal Reserve Bank’s discount window. This is a stable liquidity facility available to regulated depository institutions, but not to unregulated CDFI loan funds. CDFIs with permanent or semipermanent access to the discount window would have a resource to bolster liquidity, diversify capital sources, and more effectively respond to economic downturns and surges in community demand.

Benefits

Institutions such as community development banks and credit unions already benefit from access to the discount window for low-interest loans. CDFI loan funds likewise would use the window for short-term loans backed by portfolio assets. This additional liquidity could extend their capacity to lend through economic cycles. Over time, this could enhance the scale, stability, and impact of CDFI lending nationwide, particularly for communities and small businesses underserved by mainstream financial institutions.

Background

The discount window is the Federal Reserve’s longstanding mechanism for providing short‑term, collateralized loans (i.e., asset-backed loans) to depository institutions to ensure liquidity and financial system stability. It offers primary, secondary, and seasonal credit at varying rates. Borrowers must be financially sound and pledge assets to back up the loans.

Evidence of Success

During the COVID‑19 pandemic, CDFI loan funds accessed Federal Reserve liquidity for the first time through the Paycheck Protection Program (PPP) Liquidity Facility. Accessing the window through a relationship with a bank or similar depository institution, CDFIs secured financing with PPP loans put up as collateral. Approximately 100 CDFIs and minority depository institutions participated, generating significant liquidity for loan funds and depository CDFIs alike. Although temporary, this experience demonstrated that CDFIs can effectively use the Federal Reserve discount window to offset the high cost of capital and expand liquidity during periods of crisis.

Potential Challenges

Significant challenges remain. Permanent access would require new statutory authority or complex banking partnerships. Collateral requirements pose difficulties for CDFIs focused on unsecured small business, microenterprise, and consumer lending as well as for loans funded by programs that restrict pledging assets. Discount window interest rates may also be too high for CDFIs, limiting the facility’s attractiveness in stable economic times.

Bottom Line

Permanent access to the Federal Reserve’s discount window represents a promising innovation for strengthening CDFI liquidity. During the pandemic, CDFIs showed how this could work. But scaling this approach would require significant legal, financial, and relationship adjustments for all concerned. If implemented thoughtfully, permanent or standing access to Federal Reserve liquidity could improve CDFI resilience during economic shocks and expand the industry’s ability to assist underserved communities.

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