The discount window has typically functioned as a backstop, serving as a source of reserves when conditions in the federal funds market tighten significantly or when individual depository institutions experience short-term funding pressures. Throughout much of the Federal Reserve's history, this basic structure has proven adequate to address liquidity pressures, even during some periods of market turmoil.
Liquidity essentially means easy and frictionless entry into and exit out of investment positions without loss of value. Several prerequisites underpin this: large number of participants, fewer barriers to entry, large volume of transactions, pricing efficiency, absence of risk-free arbitrage and so on. 4. Lastly, there must be efficient risk management.