Less than half of U.S. banks ready to borrow from Fed in emergency

By Thomson Reuters Apr 12, 2024 | 1:50 PM

By Ann Saphir

(Reuters) – A year after Silicon Valley Bank’s failure, less than half of U.S. banks have established borrowing capacity by pledging collateral at the Federal Reserve’s emergency lending facility, according to Fed data released on Friday.

That’s despite a crescendo of calls from financial regulators for banks to make sure they can access the Fed’s discount window quickly if trouble arises. But the data also showed some real progress, with an increase in the number of banks signing up and a jump in the amount of total collateral pledged.

SVB’s inability to access the window last March in the face of massive and rapid withdrawals by its uninsured depositors contributed to the bank’s sudden collapse.

The resulting stress that rippled through the broader banking system revealed a similar lack of preparedness at many of SVB’s peers, and prompted authorities to stand up a separate but temporary lending facility to meet additional liquidity needs. That facility – the Bank Term Funding Program – ceased loan-making operations last month.

With over $7 trillion of uninsured deposits in the U.S. banking system, regulators say more banks need ready access to the discount window.

Friday’s data on discount window readiness, the first ever broad accounting by the Fed of its facility’s reach, show there has been some progress.

Overall 5,418 banks and credit unions – of a combined total of 9,537 – had the legal agreements in place to borrow from the Fed’s discount window at the end of 2023, up from 4,952 a year earlier, the data show.

Some 2,917 of those banks and credit unions have taken the next step toward discount-window readiness by pledging collateral, compared with 2,634 a year earlier. The total value of collateral pledged rose to $2.76 trillion from $2.06 trillion a year earlier, as deposit-taking institutions beef up their capacity to take out a discount window loan if needed.

The data also show that banks are more discount-window ready than credit unions. That’s important because on average about 40% of bank deposits are uninsured, making them vulnerable to an SVB-style run; the figure for the typical credit union is less than 3%.

Even so, the 1,996 banks with pledged collateral at the discount window is less than half the 4,824 total, the data show; and as many as 900 banks are not signed up at all.

“Pre-pledging collateral at the discount window and conducting periodic transactions, including during normal times, greatly facilitates borrowing by institutions on short notice,” the Fed said in the description of its data.

(Reporting by Ann Saphir; Editing by Dan Burns and Andrea Ricci)