Question

Why might a bank be willing to borrow funds from other banks at a higher rate than it can borrow from the Fed?

Answer 1

Why might a bank be willing to borrow funds from other banks at a higher rate than the rate at which it can borrow from the Fed? Borrowing from the Fed involves collateral whereas a bank with higher interest rates does not involve collateral. ... The bank needs to lower its capital in order to raise its return.