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The interest rate that banks must pay on money borrowed from regional federal reserve banks is the______

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The interest rate that banks must pay on money borrowed from regional Federal Reserve banks is the Discount Rate

Commercial Banks can take loans from the Federal Reserve Bank but the loans given to the banks are paid back with interest. The interest rate being charged by the Federal Reserve banks on the loans issued to banks is called a discount rate.

Further Explanation

Financial institutions or commercial bank accesses this loan through the Federal discount window loan process.

Commercial banks or financial institutions through the discount window loan process can borrow money they need in the short-term. All the 12 regional branches of the fed can provide these loans.

Financial institutions or commercial banks used the loaned capital for the following reasons

  • To take care of funding shortfalls
  • To avoid the risk of going out of business
  • To prevent internal financial crises

These loans are provided for a short term period, typically 24 hours or less. The discount rate is managed by the boards of the Federal Reserve banks with the approval of the boards of governors.

There are three tiers of loans being run by the federal window program and these include

  • Primary credit program
  • Secondary credit program
  • Seasonal credit program

The rate of each of the three tiers are separated but also closely related.

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KEYWORDS:

  • loans
  • interest rate
  • federal reserve banks
  • regional banks
  • money
  • borrowed

The interest rate that banks must pay on money borrowed from regional Federal Reserve banks is the discount rate.

Further explanation:

Discount rate:

The discount rate refers to the interest rate that is charged by the federal bank to the commercial bank for the discount window loan process. The federal bank has window loan process:  

1. Primary credit program

2. Secondary creditprogram

3. Seasonal creditprogram

Primary credit program is provided for the short term and the discount rate on this program is same as short-term market interest rate. The secondary credit program is given to the institutes that are not qualified in primary credit program and the discount rate is higher than the discount rate charged on primary credit program. The seasonal credit program is provided for the seasonal requirements such as agricultural requirements.

Thus, the discount rate is the interest rate charged by the federal bank to the commercial bank for the discount window loan process.

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Answer details  

Grade: Senior School

Subject: Economics

Chapter: Banking

Keywords: Interest rate, banks, pay, money, borrowed, regional, federal, reserve banks, federal bank, commercial bank.