A central bank standing facility is a permanent arrangement under which eligible banks can, on their own initiative, borrow money from the central bank against collateral or deposit surplus funds with it, at a pre-announced interest rate. Most standing facilities are overnight. Unlike open market operations, which the central bank starts and sizes itself, a standing facility is available on demand to any eligible institution that meets its conditions.
Standing facilities serve two purposes. They act as a safety valve for banks short of cash at the end of the day, which links them to the central bank's role as lender of last resort, and they help keep short-term market interest rates close to the policy rate. Examples include the European Central Bank's marginal lending and deposit facilities, the US Federal Reserve's discount window and standing repo facility, and the Bank of England's operational standing facilities.
Central bank standing facility in plain terms
Think of a shop that will always buy back unwanted stock at a slightly low price and always sell extra stock at a slightly high price. Nobody in the market will sell much below the buy-back price, or buy much above the selling price, because the shop is always there as an alternative.
Standing facilities do the same for money. Because a bank can always lend surplus cash to the central bank at one rate, and always borrow from it at a higher rate, rates between banks tend to stay between those two levels. And a bank that is short of cash late in the day knows there is a place to go.
How standing facilities work
- Lending facility. The bank borrows overnight against eligible collateral, valued after a haircut, often through a repurchase agreement. The rate is set above the main policy rate.
- Deposit facility. The bank places surplus reserves with the central bank overnight and earns the deposit rate, which is set at or below the policy rate.
- Eligibility. Usually limited to banks and similar institutions with a central bank account, sometimes extended to other counterparties.
Facilities are typically available at the end of each business day, and the borrowing bank pays only for what it uses. Some central banks also offer intraday credit, which must be repaid before the day ends and is distinct from overnight facilities.
Corridor and floor systems
In a corridor system, the lending rate forms a ceiling and the deposit rate a floor, with the policy rate in between. If a central bank's policy rate is 3.00 per cent, it might set the lending facility at 3.25 per cent and the deposit facility at 2.75 per cent, so overnight market rates should trade inside that half-point corridor. The central bank then supplies just enough reserves to keep the market rate near the middle.
Since the global financial crisis and large asset purchase programmes, many central banks have operated a floor system instead. Reserves are abundant, so market rates fall towards the rate paid on deposits, and that deposit or reserve rate effectively becomes the policy rate. The Federal Reserve steers rates through interest on reserve balances and an overnight reverse repo facility, while the ECB's deposit facility rate has been its key signalling rate since it moved to ample reserves. In 2024 the ECB announced that it would keep steering through the deposit facility rate and narrowed the gap between that rate and its main refinancing rate.
Examples by central bank
| Central bank | Lending facility | Deposit facility |
|---|---|---|
| Federal Reserve | Discount window (primary, secondary and seasonal credit); standing repo facility since 2021 | Interest on reserve balances; overnight reverse repo facility for a wider set of counterparties |
| European Central Bank | Marginal lending facility | Deposit facility |
| Bank of England | Operational standing lending facility | Operational standing deposit facility; reserves remunerated at Bank Rate |
Stigma and limitations
A standing facility only works as a safety valve if banks are willing to use it. Many banks fear that borrowing from the central bank will be seen as a sign of weakness, a problem known as stigma, which has been widely discussed in relation to the Federal Reserve's discount window. During market stress in 2008 and 2020, central banks created temporary facilities and auctions partly to get around this. Facilities are also limited by collateral: a bank without enough eligible assets cannot borrow, which was a concern for some US banks in 2023 and led to the temporary Bank Term Funding Program. Regulators now encourage banks to test their access in advance so that the facility can be used quickly. Effects on monetary policy transmission and on the federal funds rate are monitored closely when facility terms change.