Yahoo Finance Fed’s ‘Stigmatized’ Emergency Tool for Banks Draws Flak at Own Conference
(Bloomberg) -- The Federal Reserve needs to do more to address issues that keep US banks from tapping a key emergency lending facility.
Most Read from Bloomberg
Hims Debuts $199 Weight-Loss Shots at 85% Discount to Wegovy
Iran State TV Says ‘No Sign of Life’ at Helicopter Crash Site
Jamie Dimon Says Succession at JPMorgan Is ‘Well on the Way’
One of the Last Big Bears on Wall Street Turns Bullish on US Stocks
That’s the message of current and former central bankers and experts, who delivered some cutting observations aimed at the Fed’s efforts to revamp the backstop program, known as the discount window, during a Federal Reserve Bank of Atlanta conference on Monday.
“The discount window is a highly stigmatized financial stability tool,” said Susan McLaughlin, a 30-year veteran of the New York Fed, as part of a panel discussion. McLaughlin, who oversaw the facility’s operations during the financial crisis, said that while the central bank is trying to take steps to make the backstop more effective, “I think we can go further.”
Fed policymakers and regulators want banks to be more comfortable using the discount window on a regular basis to ensure that they can quickly respond in the event of a financial shock such as 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. It’s operations are also seen by many in the industry as clunky, backward and burdensome.
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, but also that SVB and others were ill-prepared to access the discount window, instead relying on borrowings from the Federal Home Loan Banks, which can push up funding costs for everyone.
In the keynote speech delivered early Monday at the Atlanta Fed conference, Michael Barr, the Fed’s vice chair of financial supervision, said regulators are discussing changes that would make institutions more prepared to use the discount window, in addition to new bank liquidity rules. These include requiring banks over a certain size to maintain a minimum amount of readily available liquidity at the discount window via a pool of reserves and pre-positioned collateral, based on a percentage of uninsured deposits.
Fed Chair Jerome Powell said in March the central bank has “a lot of work to do” to promote use of the discount window, including technological improvements and eliminating the stigma problem.
However, Bill Nelson, head of research at the Bank Policy Institute, said feedback from myriad bank treasurers suggests that guidance from regulators themselves is clouding the issue.
“All of the banks said it has been hammered home to them that borrowing from the discount window is not okay,” said Nelson, the former Fed economist. “Convincing banks to use the discount window ring hollow if regulations prevent them from using the discount window.”
Bank examiners have instructed bank treasurers that they can’t use the Fed’s discount window or another funding tool known as the Standing Repo Facility — where institutions can borrow cash in exchange for Treasury and agency debt at a rate that’s also in line with the top of the central bank’s policy target range — as part of their internal liquidity stress tests.
Nelson said SVB, which didn’t regularly use the repo market, was interested in signing up for the standing repo facility but lost interest once it learned it couldn’t count the facility toward its internal liquidity stress-testing requirements.
“If that was the case, we could be standing here having a very different discussion,” he said. “We would’ve had an orderly failure rather than a disorderly one.”
McLaughlin said that while banks should be turning to the fed in times of stress, the stigma surrounding the discount window is what causes banks to wait and that undermines their readiness in a crisis. As a result, it is “neither agile nor effective,” she said.
Establishing Access
She said the Fed could create a new framework for providing liquidity, including separate tools for short-term contingency funding and others for bigger issues like insolvency, done in coordination with a bank’s primary regulator. Other countries draw a distinction between these functions, she said.
While banks aren’t currently required to sign up for the discount window, McLaughlin suggested it could be a requirement as part of the bank chartering process, as well as automating collateral checks.
Luc Laeven, director-general of research at the European Central Bank said banks need to establish access in normal times, familiarize themselves with the rules and set up collateral arrangements and test the borrowing procedures so that every bank is ready to access the discount window when the need arises.
“The lender of last resort should not be like your house keys, put away mindlessly, unable to find in case of need,” he said. “That’s not convenient when there’s a fire.”
Most Read from Bloomberg Businessweek
Netflix Had a Password-Sharing Problem. Greg Peters Fixed It
Millennium Covets Citadel-Size Commodities Gains, Just Not the Risk
©2024 Bloomberg L.P.
