Diskonto

What Is Diskonto?

Diskonto, often referred to as the discount rate, is the interest rate at which a central bank lends money to eligible commercial banks, typically on a short-term basis, to meet their immediate liquidity needs. This rate is a key instrument within monetary policy, influencing the broader financial system by affecting the cost of borrowing for banks and, consequently, for businesses and consumers. Historically, Diskonto primarily involved the central bank purchasing or "discounting" bills of exchange from commercial banks at a reduced value. While the precise mechanics have evolved, the underlying principle of a central bank providing short-term funds at a specified rate through a facility known as the discount window remains a core component of central banking.

History and Origin

The concept of Diskonto has deep roots in the origins of central banking. Early central banks, like the Bank of England and later the Federal Reserve, were established partly to provide an "elastic currency" and a mechanism for rediscounting commercial paper. The Federal Reserve, created in 1913, initially used the discount window extensively as its primary tool for influencing the money supply. Banks would bring eligible commercial and agricultural loans (referred to as "eligible paper") to their regional Federal Reserve Bank, which would then "discount" them, providing funds to the banks. This practice allowed banks to manage their reserves and inject liquidity into the banking system.

Over time, particularly from the late 1920s, the role of Diskonto began to shift as central banks increasingly adopted open market operations as their main tool for monetary policy implementation. The emphasis moved from rediscounting specific commercial paper to direct advances against a broader range of collateral. For instance, in Germany, the "Diskontsatz" (discount rate) of the Bundesbank played a significant role in its monetary policy until 1987, serving as a key policy rate for refinancing banks through the sale of eligible bills of exchange. By 1987, the discounting of bills of exchange became less relevant, with repurchase agreements ("Lombardsatz" and later "Wertpapierpensionsgeschäfte") gaining prominence.⁹ The evolution reflects a broader trend in central banking where the discount rate, while still existing, often plays a more symbolic or emergency backstop role rather than being the primary active monetary policy tool.⁸

Key Takeaways

• Diskonto refers to the interest rate at which a central bank lends to commercial banks.
• It is a fundamental tool of monetary policy used to manage bank liquidity and influence overall credit conditions.
• Changes in Diskonto rates can signal the central bank's stance on economic growth and inflation.
• Historically, Diskonto involved the rediscounting of commercial paper, a practice that has largely been superseded by advances against collateral.
• While its direct use has diminished in some modern central banking frameworks, it remains an important facility for maintaining financial stability.

Formula and Calculation

The Diskonto itself is an interest rate set by the central bank, not typically calculated by external parties in the same way as a yield on a bond. However, the amount a bank receives when a bill is discounted, or the interest paid on a discount window loan, involves a calculation.

Historically, when a central bank discounted a bill of exchange, it would purchase the bill at a price less than its face value, with the difference representing the interest. The formula for the discounted value (D) of a bill with face value (F) due in (t) periods at a discount rate (r) (expressed as a decimal) would be:

Where:

• (D) = Discounted value (the amount the bank receives)
• (F) = Face value of the bill of exchange
• (r) = Diskonto (discount rate)
• (t) = Time to maturity (e.g., in years or a fraction of a year)

For modern discount window lending, it's more straightforward: banks borrow a principal amount and repay it with interest calculated using the Diskonto (or discount rate) as the annual interest rate, often compounded for the short term of the loan. This operates similarly to a standard loan interest calculation, where the cost of borrowing directly impacts a bank's balance sheet.

Interpreting the Diskonto

The Diskonto serves as a clear signal of a central bank's monetary policy stance. When a central bank lowers the Diskonto, it makes it cheaper for commercial banks to borrow funds, thereby encouraging lending and stimulating economic growth. Conversely, raising the Diskonto increases the cost of borrowing for banks, which can lead to higher interest rates for consumers and businesses, helping to curb inflation by slowing down credit expansion and overall economic activity.

While the specific types of central bank lending rates might vary (e.g., main refinancing operations rate, marginal lending facility rate, deposit facility rate at the European Central Bank), the principle of using these rates to influence interbank lending and the broader economy remains consistent.⁷ The interpretation of a Diskonto change is thus crucial for market participants to gauge the central bank's intentions regarding money supply and credit conditions.

Hypothetical Example

Imagine the central bank of the fictional nation of "Economia" sets its Diskonto at 3%. A commercial bank in Economia, "First National Bank," needs to quickly raise $10 million to cover a temporary reserve shortfall. First National Bank approaches Economia's central bank's discount window.

If the central bank provides a one-week loan based on its Diskonto:

1. Loan Request: First National Bank requests $10,000,000 for one week.
2. Annualized Diskonto: The Diskonto is 3% per annum.
3. Weekly Interest Rate: Since the loan is for one week (approximately (1/52) of a year), the weekly interest rate is (3% \div 52 \approx 0.0577%).
4. Interest Due: Interest for the week would be ( $10,000,000 \times 0.000577 \approx $5,770 ).
5. Repayment: After one week, First National Bank repays the principal of $10,000,000 plus $5,770 in interest, totaling $10,005,770.

This hypothetical scenario illustrates how the Diskonto directly impacts the cost for commercial banks to secure short-term liquidity from the central bank, which in turn influences their lending rates and broader financial decisions.

Practical Applications

Diskonto, or its modern equivalents like the discount window rate, has several practical applications in the financial system:

• Lender of Last Resort: The primary function of the discount window is to serve as a "lender of last resort." This means that in times of financial stress or sudden liquidity shortages, commercial banks can borrow from the central bank to prevent a systemic crisis or bank runs. This backstop function is crucial for maintaining financial stability. For example, during the 2008 financial crisis, the Federal Reserve significantly expanded its discount window lending to inject liquidity into the banking system, which soared to an all-time high of $403.5 billion in October 2008.
• Signaling Monetary Policy: Changes in the Diskonto rate signal the central bank's stance on monetary policy. A higher rate indicates a tightening policy aimed at combating inflation, while a lower rate suggests an accommodative policy to stimulate economic growth. While not always the primary tool, it acts as a supplementary signal to open market operations.
• Influence on Interbank Rates: Although banks typically prefer to borrow from each other in the interbank market, the Diskonto sets an effective ceiling or floor for these short-term rates. If interbank rates rise significantly above the Diskonto, banks can choose to borrow from the central bank, thus putting downward pressure on market rates. The European Central Bank's (ECB) marginal lending facility rate, for instance, provides overnight credit to banks, setting an upper limit for the overnight money market rate in the euro area.⁶

Limitations and Criticisms

While Diskonto plays a vital role, it also faces several limitations and criticisms:

• Stigma of Borrowing: A significant drawback is the "stigma" associated with borrowing from the discount window. Banks may be reluctant to use this facility, even when needed, fearing that such borrowing could signal financial weakness to investors, depositors, and other market participants.⁵ This reluctance can limit the effectiveness of the discount window as a tool for providing liquidity during crises, as banks might avoid it until other options are exhausted, potentially exacerbating a crisis.⁴ This stigma has been a persistent issue and a subject of much academic and policy discussion.
• Dependence on Bank Behavior: The effectiveness of Diskonto as a monetary policy tool depends on the willingness of commercial banks to borrow. If banks are unwilling to borrow, changes in the Diskonto rate will have a limited impact on the overall economy, regardless of the central bank's intentions.³
• Moral Hazard: Critics argue that the availability of the discount window can create a moral hazard by reducing banks' incentives to manage their liquidity prudently, as they know a backstop exists. However, central banks typically mitigate this risk through close regulation and supervision of eligible institutions.²
• Less Direct Control: In modern monetary policy, tools like open market operations and adjustments to the policy rate (e.g., the federal funds rate target in the U.S. or the main refinancing operations rate in the Eurozone) often have a more direct and immediate impact on money markets than the Diskonto. The Diskonto's influence may be more indirect, affecting the "family of interest rates" rather than directly controlling the quantity of money or credit.¹

Diskonto vs. Repo Rate

While both Diskonto and the Repo Rate are key interest rates set by central banks to influence liquidity and monetary conditions, they differ in their mechanics and typical application:

Historically, Diskonto involved the direct "discounting" of instruments, while the repo rate involves a collateralized loan structured as a sale and repurchase. In many modern central banking frameworks, the repo rate has largely superseded the direct use of Diskonto as the primary tool for injecting or absorbing liquidity and influencing short-term interest rates in the capital markets.

FAQs

What is the primary purpose of Diskonto?

The primary purpose of Diskonto is to provide a backstop source of liquidity for commercial banks and to signal the central bank's monetary policy stance.

How does a change in Diskonto affect the economy?

A lower Diskonto makes it cheaper for banks to borrow, potentially leading to lower lending interest rates for businesses and consumers, stimulating borrowing, spending, and economic growth. Conversely, a higher Diskonto can curb inflation by making borrowing more expensive and slowing economic activity.

Is Diskonto still an important monetary policy tool?

While its historical role has evolved, and other tools like open market operations are often more frequently used, Diskonto remains an important component of a central bank's toolkit, particularly as a lender of last resort and a signaling mechanism.

What is the "discount window"?

The "discount window" is the facility through which a central bank makes direct loans to eligible financial institutions at the Diskonto rate. It is a key channel for providing emergency liquidity to the banking system.