By Michael S. Derby
NEW YORK (Reuters) -Michael Barr, the Federal Reserve’s point man on bank oversight, said on Thursday that banks should put aside worries about the stigma of using the U.S. central bank’s discount window liquidity facility and tap it when it makes sense for them.
“We view using the discount window as a fully acceptable, normal part of any bank’s funding needs if it makes sense for them to use it from a financial perspective,” Barr, the Fed’s vice chair for supervision, said at a Treasury market conference hosted by the New York Fed. His comments indicated that usage of the discount window would not be seen as a sign that a bank had liquidity problems.
Barr said his encouragement of banks, along with a wide range of activities the Fed is undertaking to facilitate access to the discount window, are part of an effort to overcome a long-standing stigma surrounding this key part of the Fed’s lending toolkit.
The discount window has traditionally been viewed as a source of emergency funding for banks facing unexpected liquidity challenges. Banks themselves have long viewed discount window usage as sending a signal of distress and have shunned its usage except during periods of deep stress.
While the Fed has been trying to encourage discount window usage for some time, those efforts have struggled to gain traction. Worries over the stigma of doing so were such that when banks faced a major bout of stress in the spring of 2023 the Fed stood up a separate lending facility to ensure they had the necessary liquidity.
While some Fed officials saw a quick and large jump in discount window borrowing during that period as a sign the facility works as intended, U.S. central bank research has warned that ad hoc actions will likely be needed in the future due to the persistence of the discount window stigma.
The stress of the spring of 2023 has also driven the Fed to make sure banks are broadly ready to use the discount window, as many weren’t at that point of trouble. Part of that effort has entailed banks pre-pledging collateral for discount-window loans.
‘READILY AVAILABLE’
Barr noted in his prepared remarks that since the spring of 2023 “we saw a substantial improvement among banks of all sizes in their level of readiness.” He added that “since that time, over $1 trillion in additional collateral has been pledged to the discount window.”
The Fed’s latest data on discount window readiness had shown an increase of about $700 billion in pre-pledged collateral from year-end 2022 to year-end 2023.
He added that banks have also been signing up to use the Fed’s Standing Repo Facility, which allows eligible firms to hand Treasuries to the Fed for cash. Barr also flagged in his remarks a shift to allow banks’ to use the discount window in assessments of their liquidity levels and ability to withstand periods of stress.
“Our tools are readily available to firms,” Barr said, adding “this means that we see it as acceptable and beneficial for firms to incorporate our facilities to meet liquidity needs in both planning and practice.”
Barr’s encouragement of more regular discount window access contrasted with the views of Fed Governor Michelle Bowman, who in comments on Thursday said she favored a more traditional set-up. Bowman told the Mid-size Bank Coalition of America Board of Directors Workshop that non-emergency usage and required posting of collateral that could be used elsewhere could bring “unintended consequences.”