JPMorgan sees discount window proposal as attempt to end stigma

UNITED States regulators’ latest attempt to make the Federal Reserve’s discount window part of banks’ everyday liquidity plans could end the tool’s decades-old stigma, according to JPMorgan Chase & Co.

Banks have long been wary of tapping this Fed facility intended to provide emergency funds to firms in need. Yet use of the window has long served as a warning to financial markets that an institution is in trouble, despite regulators insistence that it carries no such taint.

The latest proposal, being drafted behind closed doors by the Office of the Comptroller of the Currency, central bank and Federal Deposit Insurance Corporation (FDIC), is a sign they are serious about making the facility part of the liquidity framework.

Michael Hsu, acting comptroller of the currency, spoke last week about a new targeted liquidity requirement that would give credit to banks for their discount window borrowing to cover ultra short-term, acute outflows up to five days. The rule would also give clarity that banks should engage in periodic borrowing from the window for operational readiness.

“At a high level, if regulators are successful in changing the perception of the discount window and usage is considered as business-as-usual, this has the potential to enhance overall financial stability by improving the liquidity position of bank,” JPMorgan strategists led by Teresa Ho wrote in a note to clients on Jan 19.

Regulators have sharpened their focus on the discount window in the wake of the failure of multiple regional banks that began in March 2023. During the turmoil, institutions borrowed a record amount of advances, or short-term loans, from the Federal Home Loan Banks (FHLBs), to meet deposit outflows and shore up their financing.

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In July, the Fed and FDIC issued a joint statement encouraging institutions to incorporate the window as part of their contingency funding arrangements. The Federal Housing Finance Agency in November released a proposal to overhaul the FHLBs, notably shifting the entities away from their role as the lender of last resort.

However, without more details, it is unclear whether regulators’ latest effort is enough to motivate banks to use the discount window as part of its everyday liquidity. Strategists are optimistic that the potential changes could even help facilitate monetary policy as banks get comfortable holding fewer reserves knowing that a de-stigmatized backstop is there.

“The discount window along with the Standing Repo Facility might perhaps help the Fed maintain a smaller balance sheet and moderate volatility in the fed funds and repo markets as banks can turn to these facilities as a source of backstop liquidity,” they wrote. BLOOMBERG