The nation’s eight largest banks are accessing a special discount fund from the Federal Reserve to provide capital to businesses and individuals in the coming months as coronavirus takes its toll on the economy.
In a March 16 announcement, the Financial Services Forum said all eight members accessed what’s known as the “discount window,” a financial tool not tapped since the Great Recession. It supports the smooth flow of credit to households and businesses, according to the Fed, by helping “depository institutions manage their liquidity risks efficiently and avoid actions that have negative consequences for their customers.”
BankingDive.com reported that institutions are reluctant to use the discount window for fear that it would signal an institution is under financial distress. To combat this reluctance, the Fed has cut rates even lower than during the financial crisis, 0.25% from 1.75%. It’s also why the eight big banks acted together.
“While Forum member institutions individually have substantial liquidity and multiple sources of funding, 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,” Forum members stated.
As Dive writer Robert Freeman reports, the discount window is just one way banks are preparing to inject capital into the economy as so many businesses are closed or restricted during the pandemic. Banks have also announced a short-term moratorium on stock buybacks, and the Fed has lowered reserve requirements for most banks to zero and said it plans to purchase an additional $700 billion worth of U.S. Treasury bonds and mortgage-backed securities.