Why would a commercial bank borrow from another commercial bank instead of the central bank?(more questions inside) 1) In my textbook, it is said that overnight rate is quarter of a percent below the bank rate, so does it mean that if bank rate is 5%, then overnight rate is 4.75%? What is the point of borrowing from the central bank then if it is cheaper to borrow from another commercial bank?
2) Is overnight rate the same as federal funds rate?
3) It is also said that if the overniht rate is too high, it discourages commercial banks to borrow from the central bank, why?
Yes, the “overnight rate” in the inter-bank market would be 4.75%, based on that description. The idea is that banks borrow from each other, not the central bank; the central bank is just providing back up facilities to cap the interbank rate. The objective is that banks need to convince other private sector entities that they are solvent, and not just the central bank.
The most important inter-bank market for domestic USD transactions is the Fed Funds market, but there is also the London inter-bank market.
This question was vague. Keeping the lending facility at a higher rate than the inter-bank rate keeps banks borrowing from themselves, for the reason noted earlier. The spread matters, not the absolute level (which was possibly implied by the question).