Industry experts believe banks will continue to favor discount window borrowing over the Federal Reserve's Bank Term Funding Program, a newly formed program designed to help financial institutions deal with liquidity concerns after recent bank fallouts.
US banks' discount window borrowing greatly outpaced Bank Term Funding Program (BTFP) borrowing, according to Fed data through March 15. Discount window borrowing was up $148.27 billion to $152.85 billion, while BTFP borrowing amounted to $11.94 billion.
Industry experts on a webinar hosted by Clark Street Capital said banks will likely continue to prefer discount window borrowing over the BTFP due to issues such as collateral options and the potential stigma attached to the BTFP.
"The problem with this program ... is a limited type of collateral [that can be used] versus the normal Fed discount window," Jason Kuwayama, shareholder at Godfrey & Kahn, said during the March 22 webinar.
Discount borrowing, the Fed's traditional lending backstop for eligible banks, offers a wide range of collateral. Meanwhile, the BTFP offers loans of up to one year that enable financial institutions to use US Treasurys, agency debt, mortgage-backed securities and other assets as collateral, which will be valued at par.
Another reason the BTFP is "problematic" is because "you're borrowing at par, so you're already underwater on that loan," Kuwayama said. He also pointed out that institutions borrowing using the program would not be able to pay back the borrowed amount, plus interest, using their pledged collateral "because it's already underwater."
Edward Hida, a senior executive adviser at Secura/Isaac Group and the CEO of Hida Advisory LLC, agreed, saying, "It's a useful program but what's the exit strategy out of that program? That's really what I think the problem is."
A stigma associated with the BTFP, similar to the Troubled Assets Relief Program (TARP) created amid the 2008 financial crisis, could also be at play in banks' decisions to access the facility, according to Kuwayama. A year after TARP was created, investors started to think that banks participating in TARP could have had problems, he said.
"There could be a similar stigma here that again, based on recency of experience, some banks may shy away from when a discount window is already available," Kuwayama said.
According to the result of a poll conducted during the webinar, 37% of the institutions on the webinar answered they will not use the program. Conversely, 18% said they have plans to use it, while 2% said they have already used it. The remaining 43% said they are undecided on how they view the BTFP.
PacWest Bancorp is among the institutions that have recently utilized the discount window and the BTFP. As of March 20, the company has borrowed $10.5 billion from the discount window and $2.1 billion from the BTFP, according to a news release.
