The Fed is the lender of last resort for
financial institutions. When banks face an unexpected need for
money that they can’t borrow in the marketplace, they can
go to what’s known as the Fed's discount window. Discount
window loans are for very short terms, usually overnight. And
banks don’t take them very often. But they are a way to keep
a potential
liquidity
problem at one bank from causing a more
serious problem for the entire financial system.
A moral hazard
Having the Fed as a lender of last resort
is important to the stability of the financial system. But there’s
a potential danger as well. The Fed has the power to prevent a
bank’s collapse. And the larger the bank, the greater the
inclination to intervene may be. Some banks might come to the
mistaken conclusion that they are too big to fail and so engage
in irresponsible lending or risk management practices.
The Fed does not consider any bank too big
to fail. At the same time, it takes steps to prevent excessive
risk-taking by individual banks and to insulate the banking system
as a whole from the impact of distress at any single bank.
Anthony Santomero,
Federal Reserve
Bank of Philadelphia
Anthony Santomero, 
