By Ann Saphir
(Reuters) – Regulatory guidelines issued in late July encouraging banks to incorporate the Federal Reserve’s so-called discount window into their contingency funding plans fail to address the main issues underlying banks’ reluctance to use it, former Fed staffer and bank policy expert Bill Nelson said in a blogpost on Monday.
Arguing that the Fed and other bank regulators could have forged new ground and taken steps aimed at reducing the stigma associated with taking emergency Fed loans, he said authorities instead chose to “do essentially nothing almost five months after the bank failures.”
“It is critical that the Fed reduce stigma so that banks are prepared and willing to borrow when necessary,” said Nelson, chief economist at the Bank Policy Institute, a lobbying group.
Nelson previously worked at the Fed, where he was involved in discount window policy, including changes made 20 years ago aimed at reducing barriers in part by no longer requiring banks to first exhaust other emergency liquidity resources.
In Nelson’s view, and that of other experts, stigma remains a problem despite several bouts of intense discount window use by banks since then, including after the March failure of two large regional banks that triggered a cascade of deposit withdrawals and widespread financial market turmoil.
A recent Reuters analysis shows that many small banks, and even some large banks, do not conduct frequent tests of the discount window, calling into question their readiness to use it when needed.
In recent months the Fed has undertaken a push to get more banks to sign up to and test access to the discount window, and in late July the Fed and fellow bank regulators issued a reminder to banks to do so.
To Nelson, the new guidance simply repeats existing directives that have done little to overcome bank wariness. Regulatory agencies should make it clear that bank examiners will not view discount window use negatively, he wrote.
Bank executives say the potential for public disclosure and negative treatment by bank supervisors discourage use of the discount window, according to a Fed survey of senior bank financial officers taken in May and released last week.
(Reporting by Ann Saphir; Editing by Andrea Ricci)
