The banking crisis in March 2023 highlighted the shortcomings of the discount window’s current operations. Silicon Valley Bank and Signature Bank were not prepared to borrow from the Fed. This has led to calls for requiring banks to pre-position collateral at the Fed and test their arrangements to ensure that they can access the window during the time of financial stress.[1]
In this blog post, we examine the liquidity of Category III and IV banks after accounting for their borrowing capacity at the discount window.[2] Information on discount-window borrowing capacity is provided on the banks’ 10-Ks. We focus on large regional banks because in their annual filings, most Category I and II banks do not separately report their borrowing capacity at the discount window versus their borrowing capacity at Federal Home Loan Banks. Given that the suggested metric is focused on a bank’s ability to borrow from the discount window, having information on two different types of borrowing capacity is crucial. In addition to reporting the levels, we present the sum of cash assets and unused borrowing capacity at the discount window as a percentage of uninsured deposits. Then, we compare these percentages in December 2022 to their levels in December 2023 to see how they changed after the March 2023 banking turmoil.
Although we normalize these contingency funding sources by uninsured deposits, it is important to note that the behavior of uninsured deposits may differ greatly based on depositor profiles. In particular, deposits of customers that have a longer-term and multifaceted relationship with the bank, and deposits that are needed for the depositors’ ongoing operations, are less likely to flee.
We find that the large regional banks are well prepared to manage deposit withdrawal risk by cash assets and the ability to borrow from the discount window. The large regional banks had large cash assets and the capacity to borrow from the discount window before the 2023 banking crisis. Nonetheless, these banks increased their holdings of cash assets and borrowing capacity at the discount window after March 2023. As a result, large regional banks are now better able to meet deposit outflows