What Is a Bank Rate?

There are times when U.S. banks 🀅need cash to meet immediate obligations to customers. At such times, they may borrow it from the Federal Reserve (Fed).

The bank rate is the interest rate that a nation's central bank, such as the ♑Fed, charges domestic banks when it l▨ends them money. These loans are often very short term.

Managing the bank rate is a method b🐠y which central banks can affect economic activity.

Lower bank rates can help to expand the economy by lowering the 澳洲幸运5官方开奖结果体彩网:cost of funds for borrowers. Higher ra♔♊tes help reign in the economy when inflation is higher than desired.

How Bank Rates Work

The bank rate in the U.S. is often referred to as the discount rate. The Fed's Board of Governors sets the discount rate, as well as the reserve requirements for member banks.

The ܫ澳洲幸运5官方开奖结果体彩网:F🔥ederal Open Market Committee (FOMC) buys or sells Treasury securities to regulate the money supply. The discount rate, the value of Treasury bonds, and reserv𓆏e requirements have a huge impact on the economy.

The management of the 澳洲幸运5官方开奖结果体彩网:money supply in this way is referred to as 澳洲幸运5官方开奖结果体彩网:monetary policy

Why a Bank Might Need to Borrow

Meeting customers' requests for withdrawals of the money they've deposited is a typical bank activity.

However, in some instances, a bank may not have enough cash on hand to s🦹atisfy all demands. This can happen when far too many people, all at once, 🎐wish to withdraw their money.

Certain points in U.S. banking history stand out for their short-term liquidity crises, including the Great Depression of the 1930꧋s, the Savings and Loan trouble in the 1980s, and the worldwide financial disaster in 2008.

The Fed stands ready to make s𝔉hort-term loans to U.S. banks to alleviate their short-term liquidity difficulties. The banks then pay back these loans with interest charged at the bank rate.

Types of Bank Rates

Banks also bor💛row money from the Fed to meet reserve requirements. The Fed offers three types of credit to borrowing banks: primary, secondary, and seasonal.𒅌

Banks must present specific documentation according to the type of credit extended and they must prove that they have sufficient collateral to secure the loan.

Primary Credit

Primary credit is issued to commercial banks with strong financial positions. There are no restrictions on what the loan can be used for. The only requirement for borrowing fundsꦿ is to confirm the amount needed and the loan repayme💯nt terms.

Secondary Credit

Secondary credit is issued to commercial banks that don't qualify for primary credit. These institutions aren't as sound so the rate is higher than the primary credit rate.

The Fed imposes restrictions on the use of funds and requires more documentation before issuing credit. The reason for borrowing the funds and a summary of the bank's financial position are required. Loans are issued for a short term, often overnight.

Seasonal Credit

Seaso𝕴nal credit is issued to banks that experience seasonal shifts in liquidity and reserves, as the nameಞ suggests.

These banks must establish a seasonal qualification with their respective Reserve Banks and be able to show that these swings are recurring. Seasonal rates are based on market rates, unlikeꦿ primary and🦹 secondary credit rates.

Bank Rate vs. Overnight Rate

The discount or bank rate is sometimes confused with the overnight rate. As noted, the bank rate refers to the rate that the central bank charges banks to b♛orrow funds.

The overnight rate, also referred to 🐭as the federal funds rate, ꦍis the rate that banks charge when they borrow funds from each other.

Banks are required to have a certain percentage of their deposits on hand as reserves. They'll borrow the money from another bank at an overnight rate if they don't have enough cash at the end of the day to satisfy their reserve requirements.

On the other hand, banks typically turn to the central bank rather than each other to borrow funds if the bank rate falls below the overnight rate. The bꦡank rate has the potential to push the overnight rate up or down, as a result.

Bank Rate's Effect on Consumer Rates

The bank rate has such a strong effect 🅘on the overnight rate that it also affects consumer lending rates.

Banks charge their best, most creditworthy customers a rate that's very close to the overnight rate while they charge their other customers a rate that's a bit higher.

For instance, banks are likely to charge their customers relatively low interest rates if the bank rate is 0.75%. They're going to charge borrowers comparatively higher interest rates if the bank rate is 12%.

Example of Bank Rates

Nations change their bank rates to expand or constrict a nation's money supply in response to changes in economic conditions.

In September 2024, the bank rate in the U.S. was 5.50%, unchanged since late July 2023. On Sept. 25, 2024, it declined to 5.25% and continued moving downward, reaching 4.5% on Dec. 25, 2025. As of May 22, 2025, it was still 4.5%

Switzerland had the lowest bank rate among all nations at 0.25%, as of May 2025. Turkey, known for having high inflation, had the highest at 46%.

The Bottom Line

A bank rate, also known as the discount rate, is the interest rate that a nation's central bank charges domestic banks that borrow money from it. Banks request loans from the central bank to maintain liquidity and meet reserve requirements.

The rates that central banks charge are set to stabilize the economy. The Fed's Board of Governors sets the bank rate in the U.S.