(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:
- One-quarter of treasurers indicated their bank was more willing to borrow from the discount window than they were a year ago, citing the new ILST FAQ, public comments from policymakers and encouragement by supervisors.
- One-third said they were more willing to borrow from the Standing Repo Facility or SRF, noting changed views of senior management and public comments from Fed officials.
- One-third of respondents indicated demand for reserves had increased over the past year, while less than 10% reported a decline.
- One-quarter of those surveyed suggested they scaled back planned use of Federal Home Loan Bank advances, a change largely driven by bank management, public regulator statements and March 2023 bank stress.
Other notable takeaways from Fed survey:
- A majority of respondents reported no change in their bank’s lowest comfortable level of reserves (LCLOR) from previous survey conducted in March 2024.
- Respondents who reported an increase or decrease in their bank’s LCLOR cited changes in retail deposit outflow assumptions or changes to broader market conditions as important factors affecting that change.
- When asked about their bank’s recent reserve management strategy over the past few months, just more than one-third reported their bank has taken actions intended to maintain the current amount of reserves.
- A majority of respondents across all three deposit types — retail, wholesale operational, wholesale non-operational — reported that betas will be set to maintain deposit balances.
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