The Federal Reserve is considering easing the terms of banks’ access to its discount window, giving firms a way to turn assets that have lost value into cash without the kind of losses that toppled SVB Financial Group.
(Bloomberg) — The Federal Reserve is considering easing the terms of banks’ access to its discount window, giving firms a way to turn assets that have lost value into cash without the kind of losses that toppled SVB Financial Group.
Such a move would increase the ability of banks to keep up with demands from depositors to withdraw, without having to book losses by selling bonds and other assets that have deteriorated in value amid interest-rate increases — the dynamic that caused SVB to collapse on Friday.
The changes under discussion were described by people with knowledge of the matter, who asked not to be named because the talks are confidential. The Fed declined to comment.
Some banks began drawing on the discount window Friday, seeking to shore up liquidity after authorities seized SVB’s Silicon Valley Bank, people familiar with the situation said, the latest sign of mounting stress among the nation’s lenders. In doing so, banks were reaching beyond the so-called lender of second-to-last resort, the Federal Home Loan Bank System, which has seen a surge in borrowing over the past year.
Unclear is how many banks did so. At least one would have normally used the New York FHLB. In a statement, the New York FHLB said it had experienced “heightened demand from our members as they reacted to a volatile market” but was able to honor borrowing requests made on Friday.
The Fed currently has two lending programs under the discount window. The primary credit program is for healthy banks that can bring collateral to the Fed and get loans at a slight penalty to their overnight lending rate, known as the federal funds rate.
There is a second program called secondary credit which is aimed at troubled banks, which involves higher penalty rates and shorter terms on loans.
The Fed typically haircuts assets in both program to insure itself against risk. For example, Treasuries dated longer than 10 years suffer a 5% haircut to account for their volatility. The haircuts could be changed by the Fed so they pay out more credit on relatively safe pools of collateral.
Use and terms of the discount window are within the scope of the Fed’s own decision-making and avoids the multi-agency sign-off required in an emergency lending facility.
–With assistance from Saleha Mohsin.
(Updates with background on the discount window’s operation from sixth paragraph.)
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