March 9, 2024 / VOLUME NO. 304

Who’s Afraid of the Discount Window?

Before Signature Bank’s closure on March 12, 2023, it tried — and failed — to raise funds from the Federal Reserve’s discount window, a facility that provides loans to supplement bank liquidity. 

Signature didn’t have pre-approved collateral to pledge for the loan, according to a report from the inspector general for the Federal Deposit Insurance Corp. The Federal Reserve’s post-mortem review of Silicon Valley Bank, which failed two days earlier, said the bank similarly wasn’t prepared to access this funding.

The Fed’s liquidity tool likely wouldn’t have prevented those bank failures. It didn’t save First Republic Bank, which regulators closed in May 2023 after it borrowed $109 billion from the window, according to the inspector general for the FDIC. That was on top of $30 billion deposited by the largest banks, including JPMorgan Chase & Co., which ultimately bought First Republic.

But many banks did benefit from the discount window and the Bank Term Funding Program, an emergency facility that was established immediately after Silicon Valley Bank’s failure and expires on March 11.  

Through those programs, the Fed lent funds to banks that were swept up in last year’s liquidity crisis. One of those banks was Phoenix-based Western Alliance Bancorp., which was seen as a competitor to Silicon Valley Bank through its tech-focused Bridge Bank unit. Before the BTFP began on March 12, Western Alliance borrowed $25 billion from the Fed, based on company statements. After an initial deposit outflow of around 11%, deposits recovered over the rest of 2023, ending higher than the prior year. By the end of the year, Western Alliance reported that it had paid off its entire BTFP loan, which totaled $1.3 billion as of September 2023.  

The $70.9 billion Western Alliance wasn’t the only bank that took advantage of the BTFP. As of Feb. 28 — the most recent data from the Fed — BTFP loans stood at $164 billion. Discount window borrowings totaled $2.2 billion, down from $117 billion roughly two weeks after Signature and Silicon Valley collapsed.

As the Fed sunsets the emergency facility, a stigma remains around the discount window. Bankers worry about what using the facility could communicate to customers, shareholders and regulators. “It's the lender of last resort,” said Bill Demchak, the CEO and chairman of Pittsburgh-based PNC Financial Services Group, at a Brookings Institution event in early March. “The day you hit it for anything other than a test, you effectively have told the world you failed.” 

• Emily McCormick, vice president of editorial & research for Bank Director

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