Rediscounts

Rediscounts refer to a monetary policy operation in which a central bank provides liquidity to commercial banks by rediscounting short-term debt instruments that the banks hold, such as bills of exchange or promissory notes. The central bank accepts these instruments as collateral and lends funds to the banking system, typically at a rate related to the policy rate. The facility is intended to smooth temporary liquidity shortages and to influence the money supply and short-term credit conditions.

How it works in practice varies by country, but a common pattern is that banks originate short-term receivables from borrowers and discount them with the central bank. If banks need additional liquidity, they may obtain further funding through the rediscount facility, subject to eligibility criteria, collateral standards, and limits set by the central bank. The central bank may set specific instruments eligible for rediscount and determine the maturity and discount rate. This mechanism allows the central bank to influence liquidity conditions without directly altering reserve requirements or conducting open-market operations.

Policy considerations include the impact on bank credit, liquidity risk, and incentives for prudent lending. Rediscount facilities can help stabilize short-run funding pressures but may also involve moral hazard if banks rely excessively on central-bank finance. Over time, many central banks have shifted toward other liquidity tools, such as repurchase agreements and standing facilities, while some systems retain rediscount as a historical or transitional instrument.

See also: discount window, central bank lending facilities, repurchase agreements, monetary policy instruments.