Banks should incorporate the Federal Reserve’s discount window into their contingency funding plans, according to a July 28 addendum to a joint statement.
Banks should prepare to use the discount window by establishing borrowing arrangements and ensuring that sufficient collateral is available to cover their potential funding needs, according to the addendum issued by the FDIC, Federal Reserve, Office of the Comptroller of the Currency and the National Credit Union Administration.
In the days following the March failures of Signature Bank and Silicon Valley Bank, banks borrowed nearly $153 billion from the discount window. “In an environment where liquidity stress manifests quickly, the discount window is an important tool that depository institutions can utilize in managing liquidity risk,” the agencies wrote.
Some banks hesitate to borrow from the discount window out of fear of being perceived as being in a weakened financial position. Research has established that banks were willing to pay a premium to avoid using the discount window during the 2007-08 Financial Crisis. In 2020, the Fed lowered the Primary Credit interest rate by 1.5 percentage points to 0.25 percent, which was viewed as a way for policymakers to reduce stigma surrounding the program.
The statement came as regulators continue to stress the importance of maintaining adequate capital levels and having an array of funding sources available in case of an emergency. The agencies called on banks to periodically review and change their contingency funding plans as market conditions and strategic initiatives change. They also urged banks to be aware of the necessary steps to secure capital from contingency funding sources — potential counterparties, the availability of collateral and contact details.
“In particular, depository institutions should engage in planning that recognizes the operational challenges involved in moving and posting collateral to access critical funding in a timely fashion,” the report stated.
Fredrikson General Counsel Douglass Hiatt said including the discount window in liquidity planning is not a bad idea and should warrant consideration based on collateral and price requirements.