You Say Discount Window As If It’s A Bad Thing

by | Apr 8, 2024 | Risk Report | 0 comments

It is true that not everything that went wrong at SVB, Signature Bank, and First
Republic Bank can be extrapolated to the rest of the regional bank sector. It 
is, however, also true that once there is a slight whiff of bank run in the air,
every measure taken as a precaution can and will be interpreted as a sign of
impending doom. That is one of the reasons why the Fed’s discount window has not
been tapped as often as it could have been.

Banks have been able to borrow from the discount window since 1913 though for
the longest time they didn’t because it was like shooting yourself in the
reputational foot. One thing is running out of liquidity, another is making it
public. And discount window loans will be made public after two years.

But now it seems like Team Regulator is encouraging window tapping using carrots
and a little bit of stick. The carrots under consideration are making it cheaper
for banks to use the facility as well as giving the assets used for collateral
for the loans a brighter spot on the balance sheet.

The stick—in this case more of a ruler—is to (at least) require that the banks
conduct annual fire drills on using the window before anything starts smelling
burnt. (Remember that SVB did not avail themselves of the window because they
hadn’t found the time to test if they could.)

What is in it for the regulators is, of course, less panic and chaos. Mopping up
after a bank run is expensive for the banking sector and the taxpayers alike. It
is much better if you can have an orderly meltdown that doesn’t leave
bloodstains on the hallway carpet or bother the neighbors.

Regitze Ladekarl, FRM, is FRG’s Director of Company Intelligence. She has 25-plus years of experience where finance meets technology.


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