Alea

This is the beauty of the “absence of stigma”…this number should increase fast…

As per feds regulation the discount rate has to be funding of last resort not first resort (cheap financing), and the bank has to show they cannot find funding elsewhere…if this is in fact followed through, $29bil is quiet worrisome!!!

Seems much worse than 9/11. The FED (according to H.4) lent about $45 billion to banks that day but most was paid off within two weeks. We must assume the collateral for that was the usual Tsy/Agy notes (no MBS,toxeic wastetc).

Now we have $80 billion under the TAF and $28.8 billion under the PDCF. And this appears to be permanent and baed on dubious collateral (AAA by a ratings agency and valued by the CDO desk at Citi!)

Also so we can get a bounce then FNM,FRE, and LEH!

Jck:

In August the Federal Reserve changed the rules at the discount rate window and increased the term to 30 days. The Fed also said the stigma of borrowing at the window would be overlooked. Then, as now, four banks borrowed at the window to show it was “ok.”

These banks had to make a public announcement that they were borrowing to show it was ok, in part because they were afraid their borrowing would be misunderstood (”If they’re using the window, they’re in trouble!”). It did not work. Other than this announced borrowing no one else used the window. After a few weeks borrowings returned to their pre-crisis levels.

This is why the Fed created the TAF, because no bank could risk the public news that they were using the window.

Now we have the dealers attempting the same thing with their new ability to access the window. The latest data shows a massive spike. But, like the banks in August, this is largely ceremonial; Goldman, Lehman and Morgan Stanley told us they were going to borrow. As the weeks drag on, if the borrowings story high, how will street react? Will they want to know “who” is borrowing? And when the “who” known, how will customers of the “who” react? That is the unanswered question.

What would it take to make the discount window effective? In a word silence. Stop reporting the aggregate levels every week and no leaks of who is going to the window, if anyone. Let them borrow in away from the public spotlight (but under the supervision of the Fed). The real fear is an institution that borrowers from the window have their name in the paper the next day and that act creates a run. So, the risk of going to the window is too great and no one does.

You disagree?

markit:
I agree that silence is the key. The ECB facility works for that reason and the Fed and BoE don’t. The Fed can’t decree, gosplan-like, that the discount window carries no stigma, it does and there is nothing they can do about it. I agree that the discount borrowiings should be consolidated with the other assets. As long as the central bank takes collateral of inconsistent credit quality, it has to be accepted that the financing rates will vary and that’s normal but is misinterpreted by some in the market. Basically the Fed should do what the ECB does, secrecy as to who borrow what, and 3 official rates, a fed funds rate , a marginal rate for discount window borrowings that put a ceiling on borrowing at the bank and a deposit rate that a floor to deposit at the bank. With the ECB scheme it is impossiblke to have negative repos or repos below the deposit rate because the ECB is super senior to all credits including government in the zone and if they say the deposit rate is x% that’s what it is. This is not true for the Fed [ they are not super senior to the treasury ].