(Bloomberg) — The Federal Reserve is considering easing the conditions for banks’ access to its discount window, giving the firms a way to convert assets into cash without incurring losses, according to SVB Financial Group.
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Such a move would increase banks’ ability to meet depositors’ withdrawal demand without booking losses by selling bonds and other assets that have depreciated in value amid interest rate hikes – the dynamic that led to SVB. Fell 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 to draw on the discount window on Friday after authorities seized SVB’s Silicon Valley bank, people familiar with the situation said, the latest sign of growing tensions among the country’s lenders. In doing so, the banks were overtaking 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.
It is not clear how many banks did this. At least one would have used New York FHLB in general. In a statement, the New York FHLB said it “experienced increased demand from our members as they reacted to a volatile market” but was able to honor the 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 receive loans at a nominal penalty over their overnight lending rate, known as the federal funds rate.
There is a second program called secondary loans aimed at troubled banks, which involve higher penalty rates and shorter terms on the loans.
The Fed usually cuts assets in both programs to insure itself against risk. For example, Treasuries held longer than 10 years face a 5% haircut due to their volatility. The haircut could be changed by the Fed so that they pay out more credit on a relatively safe pool of collateral.
The use and terms of the discount window are within the Fed’s own decision-making and avoids the multi-agency sign-off required in the Emergency Lending Facility.
—With assistance from Saleha Mohsin.
(Updated with background on the operation of the discount window from the sixth paragraph.)
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