In the search for liquidity, banks are mostly sticking with what they know.
Recent data from the Federal Reserve shows that banks are opting to meet their liquidity needs through discount window borrowing over the Fed's new Bank Term Funding Program (BTFP). According to the data through March 15, US banks have borrowed $11.94 billion from the new BTFP program, while discount window borrowing jumped up $148.27 billion to $152.85 billion. That weekly discount window borrowing total is a new record high, beating the prior weekly record of $110.7 billion during the week ended Oct. 29, 2008, according to a March 17 note from BofA Securities Chief US Economist Michael Gapen.
Discount borrowing is the Fed's traditional lending backstop for eligible banks, and offers a wide range of collateral. The newly-formed BTFP offers loans of up to one year that allow financial institutions to use US Treasuries, agency debt, mortgage-backed securities and other assets as collateral, which will be valued at par.
Industry experts attributed banks' preference for using discount window borrowing over the new BTFP program to familiarity with the already established borrowing option, the wider range of collateral options and the potential stigma associated with the new Fed program.
No matter banks' reasoning for choosing one over the other, the usage of both programs indicates banks are looking to bolster their liquidity positions.
"The glass half-empty view is that banks need a lot of money," JPMorgan Chief US Economist Michael Feroli wrote in a March 16 note. "The glass half-full take is that the system is working as intended."
Collateral choices
Economists believe banks are turning to discount window borrowing over the BTFP because it has more collateral options.
"In our view, the choice between whether banks use discount window [borrowing] or the BTFP rests mainly on collateral pledged," BofA Securities' Gapen wrote. "Higher take-up in the discount window could merely suggest that institutions who accessed the facility preferred to pledge other securities and/or loans or held fewer Treasuries and mortgage-backed securities."
JPMorgan's Feroli also believes the discrepancy is likely due to the discount window accepting a "much wider" range of collateral than is available under the BTFP, he wrote.
Bank Policy Institute Chief Economist Bill Nelson believes banks may want to hold onto their government securities, and instead "borrow against the loan collateral they have pre-positioned at the window," he wrote in a blog post March 17.
Sticking to what they know
Familiarity with discount window borrowing compared to banks' understanding of the brand new BTFP, which was created March 12, could also be a factor in their decisions, experts said.
"Banks may already have had systems in place and been more familiar with the discount window," JPMorgan's Feroli wrote.
Similarly, Bank Policy Institute's Nelson believes "it could just be that banks are more familiar with regular discount window credit."
Stigma
Given that the BTFP program was created in the wake of recent bank failures, which have raised concerns about the industry's liquidity, some industry experts believe banks could be hesitant to tap the program in fear of a stigma attached to it.
In a recent webcast with banks, Fed officials stressed that there is "no stigma" associated with using the BTFP, PNC analysts wrote in a note on March 16. Still, "investors may be a bit more jaundiced regarding recent events," they wrote.
Although the names of individual companies who participated in the new lending program will not be available until March 2025, it could be possible for investors to piece together call report data such as a bank's balance of pledge securities, increases in borrowings with maturities less than or equal to one year, and deposit balances to "infer which banks accessed BTFP as a prudent measure and which accessed the program to fend off a crisis-level liquidity event," according to the PNC analysts.