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Fed discusses easing access to discount window to help banks

(Bloomberg) — The Federal Reserve is considering easing conditions for banks’ access to the rebate window, giving companies a way to convert assets that have lost value into cash without the kind of losses that brought down the SVB Financial Group.

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Such a move would increase banks’ ability to keep pace with depositors’ withdrawal demands, without having to take losses by selling bonds and other assets that have deteriorated in value due to interest rate rises – the dynamics that drove it that SVB collapsed on Friday.

The changes discussed were described by people with knowledge of the matter, who did not want to be named because the discussions are confidential. The Fed declined to comment.

Some banks began using the discount window on Friday to bolster liquidity after authorities seized SVB’s Silicon Valley Bank, people familiar with the situation said, the latest sign of mounting stress among the country’s lenders. By doing so, banks are reaching beyond the so-called lender of the second-to-last resort, the Federal Home Loan Bank System, which has seen a surge in lending over the past year.

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It is unclear how many banks have done so. At least one would normally have used the New York FHLB. In a statement, New York’s FHLB said it had experienced “increased demand from our members as they responded to a volatile market,” but was able to honor Friday’s loan requests.

The Fed currently has two loan programs under the rebate window. The primary lending program is for sound banks that can provide collateral to the Fed and get loans at a slight penalty on their overnight interest rate, known as the federal funds rate.

There is a second program called secondary credit, which targets troubled banks, with higher penalty rates and shorter loan maturities.

The Fed typically lowers assets in both programs to insure itself against risk. For example, Treasuries with maturities greater than 10 years have a 5% haircut to account for their volatility. The haircuts can be changed by the Fed so that they distribute more credit on relatively safe pools of collateral.

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The use and terms of the rebate window are within the scope of the Fed’s own decision-making and avoid the multi-agency approval required in an emergency lending facility.

—With help from Saleha Mohsin.

(Background updates on how the discount window works starting in the sixth paragraph.)

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