Bank borrowing from the Federal Reserve’s discount window declined in the months after the passage of the 2010 Dodd-Frank financial reform law, possibly reflecting concerns over new disclosure requirements under the law as well as improving economic conditions, Fed officials said on Friday.
Typically, use of the window is a last resort for cash-strapped banks, which seek help from loans directly from the Fed. But there is a cost: A stigma has long been associated with use of the window. The central bank typically keeps interest rates on these loans higher than the federal funds rate, or the rate banks charge each other to borrow overnight, in order to encourage banks to first borrow from their peers. The federal funds rate, the Fed's traditional policy lever for influencing the economy through changes in short-term interest rates, has been kept at rock-bottom levels since December 2008 in an effort to spur a faster pace of growth.
The Dodd-Frank law requires disclosure of the banks that use the discount window with a two-year lag. On Friday, the Fed released the first batch of borrower names, those who used the window between July 22, 2010—a day after the law’s passage—and Sept. 30, 2010. The largest loans, $70 million and $60 million, were taken out by Gorham Savings Bank of Gorham, Maine, and Commerce Bank of Kansas City, Mo., respectively.
It’s not the first time the names of discount-window borrowers have been released. In March 2011, the names of banks that used the discount window from August 2007 through March 2010 were made public following Freedom of Information Act requests from Bloomberg News and the Fox Business Network. And all the banks that used the Fed’s Term Auction Facility, which the central bank created during the financial crisis to make it easier for sound banks to borrow, were disclosed on Dec. 1, 2010. But Friday’s announcement marks a new era in which names will be made public regularly, each quarter.
The Fed informed borrowers of the new disclosure requirements after the law’s passage, Fed officials said, adding that it is impossible to quantify how much the stigma associated with disclosure might have contributed to the slowdown in lending, particularly as the economy was also showing some signs of strengthening during the same period.
The vast majority of the loans—450—made during the third quarter of 2010 were “primary credit,” available to generally healthy banks, and just 30 were “secondary credit,” those available to less-healthy banks. The rest were seasonal, designed for smaller banks coping with seasonal changes in their loans and deposits.
Most of the activity that did occur through the window was small and for normal testing purposes. For example, some banks were seeking to show regulators they had access to the window or wanted to familiarize themselves with the mechanics of borrowing from it, officials said. More than 100 of the loans were for only $1,000.