CENTRAL BANKS or other monetary authorities have at their disposal both general and specific instruments for controlling credit either by affecting its price (discount rate) or by changing its quantity.1 Open market operations and reserve ratios are general and quantitative measures; discount rates are also general but work through prices (interest rates). However, when central banks wish to influence not only the total volume of credit available but also its specific distribution among users, they may exercise selective controls by making quantitative credit allocations or by charging differential rates to various groups of banks or to individual banks.


CENTRAL BANKS or other monetary authorities have at their disposal both general and specific instruments for controlling credit either by affecting its price (discount rate) or by changing its quantity.1 Open market operations and reserve ratios are general and quantitative measures; discount rates are also general but work through prices (interest rates). However, when central banks wish to influence not only the total volume of credit available but also its specific distribution among users, they may exercise selective controls by making quantitative credit allocations or by charging differential rates to various groups of banks or to individual banks.

CENTRAL BANKS or other monetary authorities have at their disposal both general and specific instruments for controlling credit either by affecting its price (discount rate) or by changing its quantity.1 Open market operations and reserve ratios are general and quantitative measures; discount rates are also general but work through prices (interest rates). However, when central banks wish to influence not only the total volume of credit available but also its specific distribution among users, they may exercise selective controls by making quantitative credit allocations or by charging differential rates to various groups of banks or to individual banks.

The Bank Rate and the Instruments of Monetary Policy

The discount rate is the cost of borrowing from the central bank. Once a given discount rate is established, the central bank exercises its powers by changing the rate or other conditions for discounting. Increases in the rate are associated with efforts of the monetary authorities to offset inflationary pressures; reductions in the rate can be interpreted as an invitation to the business sector to enter into a period of expansion and easy credit terms. The effectiveness of these changes, however, largely depends on (1) the degree of development of the financial system and the role played by the central bank as a provider of credit, and (2) the current situation of the economy. In a highly developed economy, changes in the discount rate play a significant role in internal developments, influencing the availability of money and the cost of credit and thus affecting the country’s international position. Increases in the rate are likely to produce a general rise in other interest rates, including those paid on deposits, as a result of which monetary authorities may expect an influx of international funds. Decreases in the rate are likely to produce opposite effects.

The purpose of rules governing discount policy is to establish conditions and terms under which the market can seek accommodation at the central bank through the discount of eligible short-term documents and through advances against collateral.2 These conditions and terms include the eligibility of the documents, the kind of guarantee required as collateral in advance operations, the frequency with which these operations are permitted, the rate charged by the central bank, the limits or ceilings on borrowing from the central bank, the penalties that may be applied if the ceilings are exceeded, and restrictions on the kind of institution that may call for credit from the monetary authority.

Central banks in financially underdeveloped countries are limited to the establishment of requirements for reserves against the deposit liabilities of commercial banks, and to changes in the terms and conditions under which credit is supplied to the banking system, as primary tools for regulating the volume of liquidity.

In financially underdeveloped countries—and a number of countries of high industrial development such as Japan belong in this group—the commercial banks do not hold either sufficient paper eligible for discounting or large enough amounts of government short-term securities from which the central bank could make purchases. In these countries, open market operations “are likely to be a most ineffective tool for implementing monetary policy”3—indeed, not only ineffective but impracticable. A number of conditions must be fulfilled before a capital market can serve as the environment for operations that can influence substantially and regularly the expansion and contraction of money supply and credit.4

It is true also—and this point is emphasized in this paper—that the discount rate in developing financial markets is not related to the “family of interest rates” effective in the economy. It reflects, therefore, only the willingness of the central bank to make advances to the government or the private sector at a nominal rate, or by a subsidized rate to favor agriculture or industry directly or through the medium of the commercial banking system. While the name “discount rate” is used in financially underdeveloped as well as in financially developed countries, the function and significance of the rates are absolutely different.

For an analysis of the operation of the discount rate, countries may be classified into four groups.

The first group, the classical case, is headed by the United Kingdom and formed by those countries that have inherited the British style of central banking. In these countries the monetary authority works strictly as the lender of last resort, providing liquid funds to banks and/or the members of the money market (discount houses in the United Kingdom) for very short periods of time, and at a rate considerably higher than the interest rate prevailing in the market. Under these circumstances, borrowing from the central bank is expensive, and banks perform that operation only when all other sources are unable to provide the market with liquidity. Ceilings to the volume of discounting from the monetary authority are not commonly found in these countries. It is up to the banks to pay the penalty rate or to liquidate certain assets.

The second group consists of European countries with developed financial systems in which the central bank is another source of funds subject to policies of the monetary authority. In countries such as Austria, Belgium, France, and the Federal Republic of Germany, banks regularly call for the assistance of the central bank in the form of discounts or advances.5 These countries are likely to have more than a single rate, viz., one for discounts, another for advances, and even a third for specific types of operations, such as export bills in France or certified acceptances representing exports in Belgium. Usually, quantitative limits are imposed on borrowing from the central bank, and borrowing in excess of the established limits carries an interest rate higher than the rate prevailing in the money market.

The United States constitutes by itself a separate group. Its procedure lies somewhere between that of the group headed by the United Kingdom and that of most continental European countries. Within the Federal Reserve System, borrowings from the Federal Reserve are subject to the “principles of prudent discounting,” which take into consideration the specific financial condition of the applicant for credit as well as the general condition of the economy. It is entirely at the discretion of the Reserve Bank to lend or to abstain from doing so.

The fourth group comprises practically all of the less developed countries. In most of these countries the central bank plays a significant and almost unique role as lender of working funds to the whole economic system. Borrowing from the central bank occurs daily through discounts or advances. Commercial, agricultural, and industrial paper is eligible for discount at discriminatory rates, set so as to encourage the provision of specified types of commercial bank credit to the private sector, and to discourage other types of operations regarded as unproductive in their contribution to economic development. In a number of countries belonging to this group, the largest volume of central bank credit to banks is oriented to the financing of one specific economic activity. In Honduras, Nicaragua, Paraguay, and some other countries, the main volume of central bank discounting is in the form of agricultural paper. In other developing countries, the central bank discounts a wider variety of paper but almost invariably follows a certain pattern of priority for operations favored by the government. Only in a few developing countries (Burma, the members of the East African Currency Board, Ethiopia, Ghana, Jamaica, Jordan, Malaysia, Peru, and Saudi Arabia) does the central bank not appear to be a continuous and important source of credit to commercial banks.

In almost all less developed countries, the monetary authorities have established limits on borrowing from the central banks. In some countries, these limits are so supervised that banks cannot exceed them, and there is no regular schedule of penalties. In others, heavy penalties are imposed on banks which exceed the limits.

These are, in general, the four major types of borrowing from the central bank. In many countries in these four groups, however, a number of arrangements and practices do not fit exactly into any basic pattern mentioned above since a country may develop its internal monetary mechanism to fit its own economic and institutional environment.

Accommodation at the Discount Window

Customers of the central bank

Governments and the banks are usually the main clients of the central bank. Not all central banks, however, regularly accommodate commercial banks. In some countries, there is a tendency to consider that regular and frequent discounting at the central bank is not a sound practice and to confine the transactions of central banks with other banks to those arising strictly from the central banks’ function as lenders of last resort, at a penalty rate, as prescribed by the British style of central banking. In others, there is a tendency to assume that the purpose of central banks’ discount operations should be to encourage the development of commercial banking facilities. Discounting “enables banks to economize their till money without increasing the risk of being broken by a ‘run’ for cash.”6 When banks can economize cash reserves, they increase their earning power by increasing the volume of credit—of course within the limits established by the monetary authority. The right to borrow continuously from the central bank amounts to a subsidy given to the commercial banks, but, as Professor Sayers points out, “it has the additional advantage of developing contacts between the various parts of the banking system and making it easier for the central bank to enforce its policy.”7 Countries in which the central bank does not constitute an important and permanent source of financing to the banking sector include Australia, Burma, Canada, Ethiopia, Ghana, Iraq, Jamaica, Jordan, Kuwait, Lebanon, Libya, Malaysia, the Netherlands, Norway, Peru, Saudi Arabia, Sweden, Switzerland, the United Kingdom, and the United States. On the other hand, in many Latin American and Asian countries, borrowing from the central bank is an important and permanent source of bank credit, and the consensus in both the private sector8 and the banking enterprises is that the economy could not function without liberal central bank credit. In these countries, therefore, measures taken by the central bank to expand or contract the volume of credit to banking institutions have serious implications for the financial system. In countries where the central bank is not in close contact with commercial banks through the discount window, the central bank has to rely on changes in reserve requirements and other instruments of control, in order to alter the volume of credit. However, for the great majority of countries, the only instruments available to control effectively the volume of money supply are changes in the ratio of reserves and in the actual amount lent.

The official institutions9 of some countries have access to central bank credit. In Afghanistan, Brazil, Chile, Ecuador, El Salvador, Iran, Nicaragua, Paraguay, the Philippines, the Syrian Arab Republic, and Uruguay, loans from the central bank to these institutions are rather large. In a few other countries, this type of lending exists, but the amounts are not of much importance. There are also countries in which lending to these institutions is forbidden by banking regulations.

In some countries, the private sector may borrow from the central bank only under special circumstances; in others, these operations may be performed regularly. In many countries, the private sector constitutes one of the outlets for central bank credit. Countries in which the central bank’s claims on the private sector are rather large relative to the size of its other assets include Afghanistan, Brazil, Ecuador, Colombia, Finland, Greece, Haiti, Iceland, Mali, Morocco, New Zealand, Portugal, Somalia, Turkey, and Uruguay. In Ecuador, for instance, the large volume of credit extended to the private sector (S/565 million at the end of 1964) is mainly the result of direct discounting of agricultural paper to finance exports. In Colombia, this type of credit is provided mainly to finance the National Coffee Federation, financial corporations, and other private institutions.

In Finland, credit to the private sector is extended regularly at a rate somewhat lower than the basic discount rate (7 per cent per annum at the end of October 1965); commercial bills from the metal industry and from exporters carry preferential discount rates (6½ per cent and 6–6½ per cent, respectively).

Claims of the Bank of Greece on the private sector are relatively large. The rate charged by the Bank in discount operations with the private sector is equal to the rate charged by the commercial banks.

In Norway, the Norges Bank may grant credit to businesses but only in participation with other banks. For this credit, the Bank charges a rate equal to that of the participating bank. The advances made are usually in the form of cash credits at a rate of 5 per cent (at the end of September 1965) on the amount disbursed and outstanding. In addition, the Bank may charge a commitment fee of ¼ of 1 per cent quarterly on the amount committed. These credits are made available to businesses in areas where the economy is not well developed and where sufficient local bank credit is scarce. However, the volume of these operations is not large.

Although the charters of many recently established central banks provide for operations with the private sector, these operations are becoming less important, and in some places they are confined to emergency periods and circumstances. Large central bank claims on the private sector are typical of less developed countries. Where the banking system is well established, the process of financing economic activity is left in the hands of commercial and specialized institutions. In developing economies, it is necessary to permit the central bank to participate in operations with the private sector in areas where commercial banking facilities are inadequate. However, as the banking structure of developing countries becomes more effective, the volume of operations effected directly between the monetary authority and the private sector, without the participation of commercial banks or other financial intermediaries, may be expected to decrease.

In a few countries the central bank is still the largest commercial bank. Its claims on the private sector may be expected to be large in such countries as Bolivia and Uruguay.

Types of accommodation

Central bank accommodation to banks is provided in the form of discounts,10 advances, and loans against securities. While for many years discount operations were the only way to obtain accommodation from the central bank, borrowing against collateral in the form of government and other securities has been gaining popularity in the recent past.

The use made of discounts, on the one hand, and advances from the monetary authority, on the other, varies from country to country. Italian banks, for instance, prefer to borrow against securities rather than to discount ordinary trade bills or Treasury bills because advances on securities are less costly than rediscounting; although the nominal rates for the two types of accommodation have been identical for years, the interest on discounts is payable in advance. Discounts at the Deutsche Bundesbank of the Federal Republic of Germany account for the largest portion of credit to banks. Since the rate on advances against securities is 1 per cent above the basic discount rate, these advances are sought only when the credit institution has exhausted its quota at the central bank.

Borrowing from the U.S. Federal Reserve Banks may take the form of discounting short-term commercial, industrial, and other financial paper, or of obtaining advances against government securities and other eligible collateral; most operations are, however, in the form of advances. The Bank of England discounts Treasury bills or approved bills of exchange for the discount market, which operates primarily on call money borrowed from the commercial banks. It also makes advances to the market against the security of such bills, or of British Government securities with five years or less to final maturity.

In some Latin American countries (e.g., Honduras), advances are the most common way of central bank financing, and in others (e.g., Brazil, Colombia, and Costa Rica) most commercial bank borrowing takes the form of discounts. Generally, where the central bank provides funds for short periods only, banks prefer advances to discounts because advances are more suitable to accommodate very short-term requirements and because they are simpler.

In a number of countries, central bank regulations provide only for one of these two types of operation.

Right or privilege of accommodation

Borrowing from the central bank is generally regarded as a privilege granted to banking institutions by the monetary authorities; only exceptionally is a legal right established.

Banking legislation in some countries requires that commercial banks shall not be permanently in debt to the central bank and that the use of discount facilities be limited to shortfalls in the banks’ liquidity occurring in very unusual circumstances. In other countries, although commercial banks may legally call for credit from the central bank at any time and without much difficulty, these banks actually always keep excess reserves. Therefore, discount operations either never take place or involve insignificant amounts relative to the size of other central bank assets.

The resources of banking institutions consist usually of their capital and deposits, and this is the situation in most countries with newly established central banks and in several less developed countries. There are, however, also countries in which commercial banking operations are dominated by branches of foreign banks; such branch banks are not expected to depend on credit provided by the monetary authority of the country in which they operate, and their major source of financing is their head offices.

In the United States,11 borrowing from the Federal Reserve Banks is a privilege granted to the members of the System but one that is rarely exercised. It is a long-established tradition among U.S. bankers not to resort to resources borrowed from the monetary authority. This tradition reinforces the position taken by the Federal Reserve System that banks borrowing from the Federal Reserve Banks must be subject to “principles of prudent discounting.” Reserve funds are available only on a short-term basis to meet unusual cash drains. “Under ordinary conditions, the continuous use of Federal Reserve credit by a member bank over a considerable period of time is not regarded as appropriate.”12 Each credit application from a member bank is carefully analyzed by the Federal Reserve Bank, considering the purpose of the credit and its “probable effects upon the maintenance of sound credit conditions, both as to the individual institution and the economy generally.”13 When a bank indulges in an “abuse” of the discount privilege, it is warned by the Reserve Bank. In general, however, banks follow closely the rules laid down by the Federal Reserve Banks, and there is usually no friction between the Reserve Banks and the members of the System.14

In Latin America, as Tamagna points out, rediscount has traditionally been considered an instrument of monetary policy that the central bank may discretionally wield, as well as a privilege that commercial banks may enjoy but not demand as a right. This concept has been accepted in Latin America as part of central banking doctrine.15

In some countries, certain types of paper are automatically discountable at the central bank,16 and this operation is accordingly regarded by both the monetary authority and the banking institutions as a right of the latter. Without a significant reason, the central bank of these countries cannot refuse to provide finance on the basis of paper which, according to the existing banking regulations, can be considered as eligible for discounting at the central bank. On the other hand, the central bank in many other countries can refuse at any time to discount paper presented by banks without giving any formal reason. In general, discount policy is at the discretion of central banks, the great majority of which are therefore inclined to think of discount facilities as a privilege granted to banks. Where the discount rate is of a penalty type, as in the United Kingdom and Canada, borrowing from the central bank is more likely to be considered as a right of the banks.

Quantitative Limits and Penalties

Quantitative limits or ceilings on central bank credit to banking institutions are imposed in practically all discount markets, to control the volume of credit and to influence its distribution. This latter purpose, often fulfilled by means of differential discount rates, is especially stressed in less developed economies.

Where the discount rate has the character of a penalty rate, no limits are set on central bank credit. For example, the 12 discount houses forming the London Discount Market Association are the only institutions that can borrow from the Bank of England as a lender of last resort; the Bank of England “can choose the method by which it provides the market with cash, and can dictate the terms on which it will lend; but it will never refuse to lend.”17 This statement implies that there are no quantitative limits to credits to the discount houses in the United Kingdom.

In countries that have followed the British style of central banking, there is only one single rate for discounting at the central bank. This rate has the character of a penalty rate, that is to say, it is higher than the prevailing short-term interest rate of the market. Other terms and conditions of borrowing are also severe.

The Radcliffe Committee is very clear on this point:

Borrowing from the Bank of England is kept at the minimum by reason of the fact that the terms are severe by comparison with the terms on which money can normally be borrowed from day to day in the market (i.e. they are “penal” terms). Loans are usually for a minimum period of seven days (whereas all the other marginal money which the discount houses borrow is from day to day), and at Bank Rate (whereas day-to-day money rates in the market are normally anything from 1 to 1¾ per cent, below Bank Rate).18

Borrowings from the central bank are therefore kept at a minimum level, since it is not good business to use such financing when it costs more than credit from other sources in the financial market.

Countries in which the central bank does not prescribe formal quantitative limits on credits to banks include Afghanistan, Australia, Burma, Canada, Ghana, Ethiopia, Ireland, Italy, Jamaica, the Netherlands, New Zealand, the United States, and Venezuela.

The Bank of Italy does not set a ceiling for every bank, up to which it can obtain discounts or advances. This does not mean, however, that banks can automatically obtain unlimited accommodation at the Bank of Italy. Generally, the Bank makes the granting of credit to a bank dependent on its maintaining a certain ratio of discounts and advances to its deposit liabilities. The South African Reserve Bank has some quantitative limits on credits granted to banking institutions; there is, however, some latitude in the application of these limits under conditions of monetary tightness or stress.

Practically all other countries have some kind of limits on banks’ borrowing from the monetary authorities. In some, these limits are given in absolute terms; for instance, the central banks in Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua regularly fix absolute discount ceilings for individual banks within an over-all limit for the whole banking system. However, credit limits are most commonly expressed as a percentage of the capital accounts or of the deposits held by banking institutions. In Sweden, for instance, this limit is fixed at 50 per cent of the capital of the bank. In Finland, the limit for discounting is fixed for most of the discounting banks at 2.5 times the volume of their own funds. In the Republic of China, the amount of central bank credit at the call loan rate is limited to 10 per cent of the total deposits in the borrowing bank. In Greece and Iran, credits are determined individually according to the creditworthiness of each bank.

In the Philippines, in May 1964, a ceiling was set at 50 per cent of the “net worth” of the borrowing bank on March 31, 1964. In Libya, the ceiling is 20 per cent of the bank’s capital and reserves or 10 per cent of its deposits, whichever is the lower. In Colombia, there is an “ordinary” limit (45 per cent of the bank’s capital and surplus), as well as two lines of “special” discounts, one for 75 per cent of the discounted value of warehouse bonds covering domestically produced articles and one—a special quota for development loans—for 50 per cent of the amount by which bank loans exceed the stipulated minimum ratio of 36 per cent of total earning assets. In Uruguay, where discount policy is a major instrument of control, the Bank of the Republic has established limits of 30 per cent of the banks’ capital and reserves on December 31, 1964 for commercial paper, and of 50 per cent of the same accounts for agricultural and cattle-raising paper.

In most countries where quantitative limits are imposed, there is also a series of penalty rates payable on amounts borrowed in excess of those limits. In the Republic of China, credits in excess of 10 per cent of total deposits of the borrowing banks are charged at the highest rate on the market. In Iceland, a penalty rate of 15 per cent is charged when a bank’s current account with the central bank is overdrawn without prior authorization.

The Bank of France quotes two penalty rates. One (taux d’enfer) is applied to banks exceeding the established ceilings up to 110 per cent, and the other (taux de superenfer) is paid by banks when their borrowings exceed 110 per cent of the ceilings.19

In Pakistan, a highly progressive schedule of penalties is applied to banks exceeding the quota established by the State Bank. For sums borrowed exceeding the quota by 100-200 per cent, the penalty rate is ½ of 1 per cent above the bank rate; for 200-400 per cent of the quota the rate is 1 per cent above the bank rate; for 400-600 per cent of the quota, 1½ per cent above the bank rate; and for credits in excess of 600 per cent of the quota, 2 per cent above the bank rate.

In India, scheduled banks may borrow from the Reserve Bank at the bank rate when their net liquidity position20 is at or above 30 per cent. When this condition is not fulfilled, for every percentage point (or fraction thereof) by which the ratio falls below 30 per cent, the rate charged on the entire amount borrowed by a commercial bank from the Reserve Bank is stepped up by 1 per cent above the bank rate.

In Japan, Korea, Tunisia, and most of the Latin American countries, heavy penalties are also applied.

In several countries, quantitative limits are imposed on central bank lendings, but there is no schedule of penalties. Here, either the central bank has strict control over bank accounts or the banking institutions are fearful that the central bank may take reprisals. The result is that the limits set up by the banking authority are seldom exceeded. Among these countries are Portugal, Spain, the Sudan, the Syrian Arab Republic, Thailand, and Viet-Nam. The Bank of Greece keeps strict control over the volume of credit granted to commercial banks so that under no circumstances can the limit be exceeded. In the Philippines, a penalty rate of 8 per cent was enforced until May 1964; since then, borrowings in excess of the quota are referred to the Monetary Board and the penalty is determined on a case-to-case basis. In South Africa, while no statutory or customary schedule of penalties exists, the Reserve Bank may apply penalty rates to banks when it deems that calls on its credit are undesirable or excessive.

Effect of Rate Changes

In developed economies, where changes in the rate are made frequently and where there are only one or two discount rates, a change in the rate clearly reflects the wish of the monetary authority to change the system of interrelated rates, and through these changes to expand or contract the whole volume of credit. In less developed countries, a change in the rate is more likely to be made in conjunction with other measures designed to change the distribution of credit rather than to influence the rate structure. Econometric measurements seem to prove that for the less developed countries as a whole, interest rates play only a small role in explaining the demand for money. In developing economies, especially those suffering from substantial inflation, the effects of changes in the discount rate are indeed minimized. In these countries, the gap between the interest rate charged by the banks to the public and the rate that they pay for their own borrowings is so wide that the first can only be affected by very substantial changes in the discount rate. Small increases in the rate can easily be absorbed by the commercial banks and can only reduce insignificantly their profits from the interest differential. Changes in the discount rate in such countries are infrequent, while in most developed countries changes are made often. The following number of changes were made in some representative less developed countries from the end of 1948 to September 1965: Mexico none, Uruguay none, Peru 1, Colombia 2, Iran 2, Pakistan 2, Venezuela 2, and India 5. By contrast, changes in some developed countries were as follows: Finland 10, the United States 24, Germany 25, Belgium 25, and the United Kingdom 28. The number of changes, however, is not the only indication of changes in discount policy, nor can one evaluate the policy followed in a country merely by noting the movements in the discount rate quoted by the central bank. Other terms and conditions of discounting are probably as important or more so. Central banks may make it easier for banks to discount documents by enlarging the percentage of the face value of the document that may be discounted, or by extending the limits set for the banks, or by adding to the kinds of documents “eligible” for discounting, while the discount rate remains unchanged.

Multiple and Differential Rates

In developed countries, there is usually a single discount rate, or only a limited number of rates. In Austria, the National Bank quotes a rate (4.5 per cent per annum at the end of September 1965) for discounts of eligible paper. It lends against government and other eligible securities at announced minimum rates (which are ½ per cent and 1 per cent, respectively, above the discount rate), or at 1 per cent above the rate payable on the securities used as collateral, whichever is higher. The Netherland’s central bank has two rates, one for discounts and another (slightly higher) for advances to banks and bill brokers. In Belgium, the National Bank applies different rates according to the guarantee given with the documents presented for discounting, and according to whether bank acceptances originate from imports or exports. In the Federal Republic of Germany, there are two rates, one for discounts and another for advances. In Switzerland, besides the ordinary discount rate (2.5 per cent per annum at the end of September 1965), there are two rates: one for advances against securities and another for discount of credit to businesses to help to finance the building of inventories of essential commodities; these operations, however, do not represent a sizable portion of the domestic credit provided by the Bank. In Canada, beginning June 24, 1962, a fixed rate (bank rate) has been quoted by the Bank of Canada for advances to chartered banks, while the rate at which the Bank is prepared to enter into purchase and resale agreements with money market dealers (the so-called money market rate) has been set at ¼ of 1 per cent above the average rate on three-month Treasury bills at the preceding weekly tender, or at bank rate, whichever is lower. From November 1, 1956 to June 23, 1962 the Bank of Canada adjusted its lending rate each week so as to maintain it at ¼ of 1 per cent above the Treasury bill rate. The money market rate and bank rate were the same until June 23, 1962.

In South Africa, the discount rate is considered a major indicator of the policy pursued by the Reserve Bank, which quotes only one rate for its operations with discount houses, commercial banks, the National Finance Corporation, and the Land Bank. The Bank establishes quantitative limits for credits to banks. Regardless of those limits and of the rate quoted, the Bank, when granting accommodation, is free to exercise its discretion in applying penalty rates or rates below the discount rate on any type or types of securities and to any client or group of clients.

In Australia, the Reserve Bank does not disclose a discount rate. Operations with banks are very few and only take place in special circumstances. The terms and conditions of discounting are determined on the basis of a study of each request. The Bank discounts Treasury notes and Commonwealth Treasury bills; however, neither the terms of its operations, nor the amounts lent, are revealed by the Bank.

In some countries, there are fixed rates; in others, they may vary within certain limits, as do those for advances on bonds and shares in Denmark. In Sweden, there is a basic discount rate which serves primarily as a key indicator of monetary policy; the basic rule is that the interest rate on loans to credit institutions is equal to the official discount rate for the first five days and thereafter is 1 per cent higher. “The rule of minimum interest during the first five days is subject, however, to certain restrictions in respect to both the frequency with which loans have been taken by the bank concerned from the Riksbank within a certain period of time and by the magnitude of total current borrowing from the Riksbank by credit institutions.”21

In developing economies where, as we have said, the discount rate plays more the role of a device for the allocation of credit among sectors than of an instrument to control the volume of credit, the number of discount rates is large. These countries rely heavily on selective policies, on the assumption that by using these policies they can modify the level of effective demand and, therefore, the general level of prices and production. Furthermore, monetary authorities in these countries believe that they can influence not only the volume of production but also the composition of investment and production, by discriminating in the cost and availability of credit for different purposes.

In these countries, differential rates are charged according to the kind of paper discounted or used as collateral against borrowing. Generally, a basic rate is used for discounting commercial paper. This rate, usually referred to as the “discount rate,” is, however, only one of a complex of discount rates.

Some examples will show that what central banks call the basic discount rate is not always the most representative cost of borrowing from the central bank. For many countries, the basic rate is a non-operational instrument. In Thailand, for instance, the basic discount rate is 7 per cent per annum, but the most representative rate is the one of 5 per cent applicable to discounts to banks for paper arising from export operations, from the procurement of raw materials for industrial use, and from sales of industrial products by manufacturers. In Iceland, there is a basic discount rate, with the character of a penalty rate, rarely applied to central bank lending to banks; the volume of financing provided to commercial banks, however, is considerable, mostly in the form of discounting export bills at preferential rates, which are much lower than the basic discount rate.

In Peru, the Central Reserve Bank quotes two rates for discounts to commercial banks, four for its loans to development banks, and one for direct credit to businesses. In Colombia, the central bank quotes ten rates for operations with banks and a similar number for direct credit to the Central Government, financial corporations, and the private sector. The Central Bank of Ecuador quotes nine rates for operations with commercial and specialized banks, four for direct credit to the business sector, and one for its operations with the Central Government and official institutions. In Costa Rica, the Central Bank quotes ten rates, in Paraguay three, in the Philippines nine, in the Syrian Arab Republic eight, in Tunisia seven, and in Venezuela nine.

Preferential quotas and differential discount rates available to specialized banks are common instruments for the selection of credit in most developing countries. These are investment institutions partly financed by the government, cooperative banks, and other agencies engaged in the development of specific sectors of the economy but with a general objective of promoting economic development.

Summing up, in developed money markets the discount rate is determined in the light of the actual and potential demand and supply of money arising from internal forces, and is affected by international movements of short-term capital. In practically all developing countries, on the other hand, the rates are policy instruments, established to encourage credit expansion to sectors with a high potential for economic development, or to discourage investment in other sectors. Changes in the basic rate, and even in preferential rates, are rare; usually, adjustments in central bank lending operations are made by altering other terms and conditions of discounting. If the central bank wishes to encourage one particular sector, a new preferential rate is created.22 The volume of central bank credit to banks is expanded or contracted by changing quotas, eligibility requirements of documents, and other terms of discounting, but rarely by altering the discount rates. Moreover, in a number of developing countries the rate is never operative because the commercial banks always have excess liquidity; in these countries, therefore, the rate has no significance for the monetary and financial system.

Taux d’escompte des banques centrales


Cet article décrit les pratiques suivies par les banques centrales d’un grand nombre de pays pour les opérations qui visent à augmenter ou à contracter le volume de l’émission et du crédit bancaire. L’auteur y étudie le taux d’escompte en tant qu’instrument de politique monétaire, les facilités de crédit accordées par les banques centrales, la fixation de limites quantitatives, ou plafonds, au crédit consenti aux banques par la banque centrale, l’utilisation d’un taux d’escompte unique ou de taux multiples, et l’effet des variations des taux.

Le taux d’escompte ne joue un rôle important que dans quelques pays financièrement développés. Dans ces pays, il représente le coût de la monnaie primaire et il est en relation significative avec les autres taux d’intérêt sur les marchés de l’argent et des capitaux.

Dans la quasi-totalité des autres pays, le taux d’escompte est l’un seulement des prix payés par les banques pour obtenir le financement de la banque centrale. La politique de l’escompte est orientée principalement vers le crédit sélectif de façon à encourager les activités considérées comme préférentielles pour le développement économique; le taux varie rarement; il n’a pas—ou peu—de rapport avec les autres taux de l’économie, et la banque centrale élargit ou resserre le crédit qu’elle accorde aux banques en modifiant les plafonds, les normes d’acceptation des valeurs et les autres conditions d’escompte. Dans un certain nombre de pays, les banques disposent toujours d’un excédent de liquidité et n’ont jamais besoin de faire appel au crédit de la banque centrale.

Des limites quantitatives, ou plafonds, au crédit accordé par la banque centrale aux institutions bancaires existent, en général, sur presque tous les marchés d’escompte. Ces plafonds sont imposés afin de contrôler le volume du crédit et d’en orienter la répartition. Dans les économies financièrement sous-développées, les plafonds d’escompte et les taux préférentiels sont imposés surtout pour orienter le crédit plutôt que pour en contrôler le volume. Dans les pays où il existe des limites quantitatives au crédit accordé aux banques à des taux donnés, de lourdes pénalisations sont généralement appliquées lorsque le crédit dépasse ces limites.

Tipos de descuento de los bancos centrales


Este artículo describe las prácticas que los bancos centrales de un gran número de países siguen en sus operaciones para aumentar o disminuir el volumen de la emisión y el crédito bancario. Examina el tipo de descuento como instrumento de política monetaria, las facilidades de crédito que proporcionan los bancos centrales, la implantación de límites cuantitativos sobre el crédito del banco central a los bancos, el uso de tipos de descuento únicos o múltiples, y el efecto que surte la modificación de los tipos.

Solo en unos pocos países que poseen sistemas financieros desarrollados el tipo de descuento desempeña una función importante. En esos países el tipo de descuento representa el costo del dinero primario y está relacionado de modo significativo con otros tipos de interés en los mercados de dinero y de capital.

Prácticamente en todos los demás países el tipo de descuento es solo uno de los varios precios que los bancos pagan para obtener financia-miento del banco central. La política de descuento en esos países hállase principalmente orientada hacia la selección del crédito, de modo de favorecer las actividades consideradas preferentes para el desarrollo económico; el tipo rara vez es modificado, no tiene ninguna o si acaso muy poca relación con otros tipos dentro de la economía, y el volumen de crédito del banco central a los bancos se aumenta o disminuye por medio de modificaciones en las cuotas, en las condiciones de aceptación de los valores y efectos, y en otros términos del descuento. En varios países los bancos siempre tienen exceso de liquidez y nunca necesitan del crédito del banco central.

En casi todos los mercados de descuento existen límites cuantitativos o topes al crédito del banco central a favor de instituciones bancarias. Esos límites se establecen a fin de controlar el volumen del crédito y dirigir su distribución. En las economías con sistemas financieros poco desarrollados las cuotas de descuento y los tipos preferenciales se instituyen principalmente para orientar el crédito, más bien que para controlar su volumen. En países donde existen límites cuantitativos sobre el crédito a favor de los bancos conforme a los tipos dados, suele haber fuertes sanciones para los créditos que rebasen esos límites.


Mr. Jaramillo, economist in the Bureau of Statistics, Research and Statistics Department, is a graduate of the National University of Colombia and of Western Michigan University. He was with the Bank of the Republic (Central Bank of Colombia) before joining the Fund in August 1964.


This paper is based on information provided to the Bureau of Statistics of the International Monetary Fund by correspondents of International Financial Statistics. Brief notes on the discount rate and discount practices in a number of countries are given in the country pages of that publication.


In definitions of discount policy, the temporary character of the operation is often emphasized. Among several other writers, Peter G. Fousek, in Foreign Central Banking: The Instruments of Monetary Policy (Federal Reserve Bank of New York, 1957), p. 13, points out that discount policy may be defined as the varying of the terms and conditions “under which the market may have temporary access to central bank credit.” (Italics provided.) As will be seen later in this paper, there are several central banks that provide credit to the banking institutions on a regular basis, and not temporarily. Therefore, the temporary character that discount operations have in certain countries, e.g., the United Kingdom, Canada, and Australia, is not a universal characteristic of borrowing from the central bank.


Graeme S. Dorrance, “The Instruments of Monetary Policy in Countries Without Highly Developed Capital Markets,” Staff Papers, Vol. XII (1965), p. 273.


For a summary of these conditions, see Dorrance, op. cit., p. 274.


For a description of monetary policies in the member countries of the European Economic Community, see European Economic Community, Monetary Committee, The Instruments of Monetary Policy in the Countries of the European Economic Community (Brussels, 1962).


R. S. Sayers, Modern Banking (London, 6th ed., 1964), p. 297.




By “private sector” is meant corporations, unincorporated businesses, households, and private nonprofit institutions serving households.


The term “official institutions” comprises municipal and local governments and state enterprises.


The term “rediscount” is also found in the literature, to mean what is usually referred to as a discount by the central bank. In this paper, the term “rediscount” is used only when a clear distinction is needed between commercial banks’ discounts of paper for the private sector and the discount of paper by the commercial banks at the central bank; “rediscount” means the latter.


In this country, there is a sharp controversy between opponents and advocates of discount operations as effective instruments of monetary policy. See, among many others, Joseph Aschheim, Techniques of Monetary Control (Baltimore, 1961), pp. 83-98; Milton Friedman, A Program for Monetary Stability (New York, 1960), pp. 35-45; Robert V. Roosa, “Credit Policy at the Discount Window: Comment,” The Quarterly Journal of Economics, Vol. LXXIII (1959), pp. 333-37; and Warren L. Smith, “The Discount Rate as a Credit-Control Weapon,” The Journal of Political Economy, Vol. LXVI (1958), pp. 171-77, and “The Instruments of General Monetary Control,” The National Banking Review (U.S. Comptroller of the Currency), Vol. 1 (1963), pp. 49-68.


Board of Governors of the Federal Reserve System, The Federal Reserve System: Purposes and Functions (Washington, 1963), p. 43.




For a description of discount administration, see George W. McKinney, The Federal Reserve Discount Window: Administration in the Fifth District (New Brunswick, N.J., 1960).


Frank Tamagna, La Banca Central en America Latina (Mexico, 1963), p. 246.


For example, in Iceland, export bills of the fishing industry; in Spain, those of the National Wheat Service, the Agricultural and Maritime Credit (Official) Banks, and several others.


Committee on the Working of the Monetary System, Report (Cmnd. 827, London, 1959, hereafter referred to as the Radcliffe Report), p. 120. (Italics provided.)


The Radcliffe Report, p. 122.


Hannan Ezekiel, “The Call Money Market in France,” Staff Papers, Vol. XII (1965), p. 392.


For the definition of “net liquidity position,” see Reserve Bank of India, Bulletin, February 1965, pp. 198-200.


Sveriges Riksbank, Yearbook, 1963 (Stockholm, 1964), p. 32.


In Chile, for example, the discount rate since April 1959 has been fixed twice a year (in June and December) and is equal to the weighted average interest rate charged by commercial banks on their own loans during the preceding year. This rate is therefore rather high, and banks do not have much inducement to discount at the Central Bank. However, in November 1963, to encourage the development of nontraditional exports, the Bank established a rate of 2 per cent per annum for discounting this kind of paper and has since provided substantial amounts of credit at that rate.