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Fed Urges Banks to Use Discount Window to Aid Credit Flow

Fed Urges Banks to Use Discount Window to Aid Credit Flow

(Bloomberg) -- The Federal Reserve encouraged banks to take advantage of its primary emergency lending facility to keep credit flowing as the economy endures fallout from the coronavirus.

In a joint statement with the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency, the agencies said using the so-called discount window “can continue supporting households and businesses.”

“By providing ready access to funding, the discount window helps depository institutions manage their liquidity risks efficiently and avoid actions that have negative consequences for their customers,” they said Monday. “Thus, the discount window supports the smooth flow of credit to households and businesses.”

Emergency Cut

The Fed on Sunday slashed interest rates by a percentage point to almost zero, lowering the rate on discount window borrowing to 0.25%, and announced a plan to buy at least $700 billion in Treasury securities and mortgage-backed securities over the coming months.

The central bank also said it would take a number of other steps designed to keep credit markets functioning smoothly.

The Fed’s discount window is meant to provide emergency liquidity to banks that otherwise have healthy balance sheets. In a cash crunch, banks can pledge collateral to the Fed in return for cash.

Banks in recent years have been extremely reluctant to use the facility because of the reaction it can provoke among investors, who may fear it reveals a more serious problem about the institution, and among politicians keen to attack taxpayer-funded bank bailouts.

“The discount window plays an important role in supporting liquidity and stability in the banking system, and we encourage banks to turn to the discount window to help meet demands for credit from households and businesses,” Fed Chairman Jerome Powell told reporters on a telephone briefing on Sunday. “To make the discount window more effective, we also will offer discount window loans for periods up to 90 days,” he said.

To contact the reporter on this story: Christopher Condon in Washington at ccondon4@bloomberg.net

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Alister Bull, Ana Monteiro

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