Economic Brief

May 2015, No. 15-05

Discount Window Lending: Policy Trade-offs and the 1985 BoNY Computer Failure

Huberto M. Ennis and David A. Price

On November 21, 1985, the Bank of New York (BoNY) suffered a software failure that left it unable to redeliver securities it had received from other institutions as an intermediary. The result of the failure was that the bank sought and received $22.6 billion in discount window lending from the New York Fed, a record-setting amount. The episode presents a case study for considering when discount window lending and similar interventions are justified as a matter of efficiency, as well as the need for policymakers to take account of possible moral hazard that may lead to inadequate safeguards against failures — whether operational breakdowns or deficient financial strategies.

Additional Resources

Bank for International Settlements, Basel Committee on Banking Supervision, "International Convergence of Capital Measurement and Capital Standards: A Revised Framework," June 2004, pp. 137-149.

Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, "An Analysis of Federal Reserve Discount Window Loans to Failed Institutions," June 11, 1991.

Courtois, Renee, and Huberto M. Ennis, "Is There Stigma Associated with Discount Window Borrowing?" Federal Reserve Bank of Richmond Economic Brief, May 2010.

Federal Reserve Board of Governors, "Supervisory Policy and Guidance Topics: Operational Risk Management."

Fleming, Michael J., and Kenneth D. Garbade, "Explaining Settlement Fails," Federal Reserve Bank of New York Current Issues in Economics and Finance, vol. 11, no. 9, September 2005.

Lacker, Jeffrey M., "Payment System Disruptions and the Federal Reserve Following September 11, 2001," Federal Reserve Bank of Richmond Working Paper No. 03-16, December 23, 2003, pp. 21-22.

Price, David A., "When the Fed Conducts Credit Policy," Federal Reserve Bank of Richmond Region Focus, First Quarter 2012, pp. 6-8.

Schwartz, Anna J., "The Misuse of the Fed's Discount Window," Federal Reserve Bank of St. Louis Review, September/October 1992, vol. 74, no. 5, pp. 58-69.

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