By Joe Davidson, Senior Vice President
Supervision and Regulation
Federal Reserve Bank of Atlanta
Greetings,
As we head into summer, I'd like to reflect on moments and lessons learned in the recent past so that together, we may embrace opportunities to prepare for the future. Continuing the emergency preparedness theme from my previous letter "Riding Out the Storm," allow me to take a slight turn from SR 13-6 to SR 10-6: Interagency Policy Statement on Funding and Liquidity Risk Management. More specifically, I want to offer my perspective on supervisory expectations with respect to the so-called "discount window," or the lending arm of the Federal Reserve Bank of Atlanta, headquartered at 1000 Peachtree Street in Atlanta. Let's take a walk down Peachtree Street and discuss the discount window and how you can ensure your financial institution is well-prepared to manage liquidity requirements and risk with a carefully planned contingency funding strategy.
For financial institutions headquartered in the Sixth District, the Atlanta Fed's Credit and Risk Management Department administers the discount window program, handling borrowing requests and collateral arrangements. Interestingly, the discount window used to be an actual teller-style "window" at Reserve Banks, and "discounts" (and "rediscounts") of commercial, agricultural, and industrial paper were once commonplace until being replaced, procedurally, by collateralized advances in the 1970s. Advances are now more conveniently credited and repaid electronically through an institution's Federal Reserve master account or the master account of a third-party correspondent.
You can find discount window policy and information on the Discount Window Lending page of the Board of Governors website, which explains, "the discount window helps depository institutions manage their liquidity risks efficiently and avoid actions that have negative consequences for their customers, such as withdrawing credit during times of market stress." The Federal Reserve Act (section 10B) provides the statutory framework and discount window lending is governed by policies set forth in the Federal Reserve's Regulation A. By-Laws of the Federal Reserve Bank of Atlanta designate a Discount Committee, made up of executive leadership, and this committee is granted the "power to consider requests for discounts or advances made by banks or others authorized to borrow from the Federal Reserve Bank, and to approve or disapprove such requests; and to delegate to individual committee members, or to other employees, the appropriate authority to approve or disapprove requests for advances or discounts by authorized borrowers subject to ratification by the Committee."
Various lending programs are available through the discount window: primary credit, secondary credit, seasonal credit, and emergency credit. These programs vary in purpose, eligibility requirements, duration, terms, and rates. All advances must be collateralized to the satisfaction of the Reserve Bank per 12 CFR 201: Extensions of Credit by Federal Reserve Banks (or "Regulation A"). Primary, secondary, and seasonal credit are adjustable-rate loans that may be secured by a broad variety of eligible asset types (or collateral). Here's a brief discussion of each type:
- Primary credit: Advances up to 90 days' duration are available to depository institutions that are, for example, considered "generally sound" (defined as having a composite CAMELS exam rating of 3 or better and a prompt corrective action designation (PCAD) of at least Adequately Capitalized). Our primary credit program has a streamlined process with minimal administration. Borrowing can be used for a variety of needs, including preventing an overdraft, arbitrage opportunities and general funding needs, and there are no restrictions on the use of primary credit funds. Primary credit usage is further outlined in SR 03-15: Interagency Advisory on the Use of the Federal Reserve's Primary Credit Program in Effective Liquidity Management.
- Secondary credit: By contrast, this is an alternative program available to banks that otherwise do not qualify for primary credit, and it is generally available on a very short-term, typically overnight basis, with some restrictions at a rate higher than the primary credit rate.
- Seasonal credit: This is available to smaller qualifying institutions that experience and can demonstrate seasonal swings in deposits and lending during the year. Term funding under this program is available for up to nine months.
Finally, the Federal Reserve Bank has authority to provide emergency lending, pursuant to section 13(3) of the Federal Reserve Act, with the approval of the Treasury Secretary. Emergency lending programs must be broad-based and not designed to support a single institution, among other requirements. The Bank Term Funding Program (BTFP), which you may be familiar with, is an example of such a program, and it is also administered by discount window staff. (This program ceased taking new requests March 11, 2024.)
Measuring "discount window readiness" and next steps to consider
Referring back to SR 10-6, "the guidance re-emphasizes the importance of cash flow projections, diversified funding sources, stress testing, a cushion of liquid assets, and a formal well-developed contingency funding plan (CFP) as primary tools for measuring and managing liquidity risk." Including the discount window as an option when planning your institution's liquidity framework can help you meet the guidance.
Furthermore, an updated Addendum to the Interagency Policy Statement on Funding and Liquidity Risk Management: Importance of Contingency Funding Plans was issued in July 2023. It underscores that for "operational readiness, depository institutions should regularly test any contingency borrowing lines to ensure the institution's staff are well versed in how to access them and that they function as envisioned." According to our Commercial Bank Examination Manual, if primary credit is incorporated into a bank's contingency funding plan, then you "should consider conducting small value transactions at regular intervals to ensure familiarity with discount window operations" and "[E]xamination staff will not criticize institutions for testing discount window access."
"Five Steps to Discount Window Borrowing" is a helpful Community Banking Connections article from August 2024 providing guidance on next steps if you decide that the discount window is a necessary part of your liquidity risk management planning.
"The Fed is committed to operational and technical improvements to encourage broader usage of the discount window," said Jessie Bitetti, an assistant vice president of Credit and Risk Management who has responsibility for the Atlanta Fed's discount window. "This includes offering an efficient online portal application called Discount Window Direct (DWD) and partnership with the supervisory community to lessen the stigma traditionally associated with discount window borrowing."
Detailed information regarding the various credit programs and requirements, collateral eligibility, interest rates, and Discount Window Direct, is available at frbdiscountwindow.org.
Yours sincerely,
Joe Davidson
Senior Vice President, Supervision and Regulation
The Federal Reserve Bank of Atlanta