Breakingviews - Fed will struggle to open discount window wide

A pedestrian walks past the Federal Reserve Board building on Constitution Avenue in Washington, U.S., March 19, 2019. REUTERS/Leah Millis

SAN FRANCISCO (Reuters Breakingviews) - The U.S. Federal Reserve is trying to pry open the discount window with the help of big banks. Morgan Stanley, Bank of America and six others are tapping the central bank’s emergency facility to try and reduce its stigma. It’s not obvious, however, that their smaller peers will follow.

The Financial Services Forum, a trade group, wants to remove the scarlet letter that applied during the financial crisis. It said on Monday that its members would use the discount window to make banks of “all sizes” comfortable doing the same to help their clients navigate the novel coronavirus. The mega-banks emphasized that they have substantial liquidity and are making the move because of the Fed’s encouragement.

It was a different story in 2008 when hundreds of banks took advantage of the Fed’s role as lender of last resort. Their names were kept confidential until the central bank was forced to reveal them in 2011 as a result of lawsuits filed by media organizations. The 2010 Dodd-Frank law also requires the Fed to disclose which banks came calling to borrow two years after the fact.

The banks exposed, especially European ones, faced a political backlash. American politicians said the Fed shouldn’t have been propping up foreign institutions like Deutsche Bank. Others, such as Wachovia, had failed, reinforcing the stigma.

Sensitive to the political pressure, the Fed itself discouraged use of the program in regulatory planning for so-called living wills that require the biggest banks to consider their own demise in a crisis.

The central bank changed its tone as the virus outbreak dramatically affected the economy, including by slashing rates and extending the borrowing period to as many as 90 days.

The Fed worked hard behind the scenes to get the big banks comfortable. Given the capital and liquidity buffers on their balance sheets, the likes of JPMorgan can afford it. Others, such as Comerica and KeyCorp, which have customers getting hit hard by the sharp drop in oil prices, for example, may be reluctant to signal any additional problems by tapping the window if needed. And as supportive as the central bank may be, it can’t stop politicians from assailing lenders that take the chance.


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