US banking giants tap Fed's discount window to ease stigma

[NEW YORK] Eight giant US banks said they would access the Federal Reserve's discount window, in a move meant to remove the long-standing stigma of using it, as the financial system comes under mounting pressure from the coronavirus pandemic.

The banks - including JPMorgan Chase & Co, Bank of America Corp and Citigroup Inc - will use the facility to "reassure financial institutions of all sizes" that they can tap it too, the Financial Services Forum industry group said in a statement late on Monday. Federal regulators have been encouraging banks to normalise use of the window after rates in repo markets spiked in September.

The eight firms "individually have substantial liquidity and multiple sources of funding", the group said. But "they believe it is important to lead by demonstrating the value of the Federal Reserve's discount window facility and to encourage its use by other financial institutions".

The window is meant to provide emergency liquidity to banks that otherwise have healthy balance sheets. In a cash crunch, banks can pledge collateral to the Fed in return for cash. Banks have been extremely reluctant to use the facility because of the reaction it can provoke among investors, who may fear it reveals a more serious problem, and among politicians keen to attack taxpayer-funded bank bailouts.

The group of banks - deemed by US regulators to be the most important to the financial system - also includes Wells Fargo & Co, Goldman Sachs Group Inc, Morgan Stanley, Bank of New York Mellon Corp and State Street Corp. On Sunday, the same group announced that they would suspend stock buybacks through the second quarter.

Regulators arm-twisted banks to use the discount window to remove the stigma during the depths of the 2008 crisis. Firms did so briefly, but as the situation worsened, the Fed announced unprecedented new liquidity programmes to prop up the financial system.

BLOOMBERG