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Fed Discount Window Needs ‘More Work’ to Lift Bank Participation
(Bloomberg) -- The Federal Reserve has taken steps to reduce the stigma that has long plagued its discount window, though recent surveys indicate banks are still hesitant to use the key backstop facility.
Policymakers and regulators want banks to be more comfortable using the discount window on a regular basis to ensure they can quickly respond in the event of a financial shock that might trigger a run on deposits.
Banks, however, have been reluctant to turn to the backstop for fear it would be perceived as a sign of weakness or desperation. The window’s operations are also seen by many in the industry as unwieldy, backward and burdensome.
A survey of 31 treasurers conducted by Bank Policy Institute in late November and the first half of December showed about a quarter of respondents have become “at least somewhat more willing” to borrow from the discount window. Another survey by the Fed’s Senior Financial Officerconducted in September — and released on Dec. 6 — showed that on average, most of the 100 banks queried said their banks would be somewhat unwilling to borrow from the facility under certain scenarios presented.
The mission to overhaul the facility has become more urgent in the wake of last year’s collapse of Silicon Valley Bank and other regional lenders. Regulators were shocked by the rapid flight of deposits, and also concerned that SVB and others were ill-prepared to access the discount window. Instead, they relied on credit from the Federal Home Loan Banks, which can push up overall funding costs, potentially exacerbating stresses in the financial system.
In recent months, Fed policymakers have repeated calls for all banks to be signed up and ready to use the emergency liquidity tool should the need arise. It also in September published a request for comment about amending the operational practices of the discount window. The central bank clarified its rules requiring large banks to run internal liquidity stress tests (ILST) that now allow banks to anticipate using the discount window and Standing Repo Facility, which provides repo financing at rates set by the Fed, to a greater extent than was previously possible.
“The Federal Reserve is engaged in a full court press to increase banks’ willingness to borrow from the discount window and Standing Repo Facility,” Bill Nelson, head of research at the Bank Policy Institute, wrote. “Despite these results, both the Federal Reserve’s recent survey of senior financial officers and BPI’s Treasurers survey shows that more work needs to be done.”
Nelson suggested officials could provide even more clarity to the ILST rules and encourage a greater uniformity in instructions bank examiners are providing to institutions.
Other notable takeaways from BPI survey:
Other notable takeaways from Fed survey: