top of page

Discount Window Lending

Signs of a Prolonged Issue or a Quick Fix to a Temporary Problem?

-by Brandon Michaels and Chris Adnams

Silicon Valley Banking Crisis

On Wednesday, March 8th, 2023, in an effort to fortify its balance sheet, Silicon Valley Bank announced a $2.25 billion capital call to investors following substantial losses on the sale of a U.S. Treasuries and mortgage-backed securities portfolio. In the 48 hours that followed, the fastest bank run in United States history led to the U.S. economy’s second largest banking failure. In the March 22nd Federal Open Market Committee meeting, Federal Reserve Chairman Jerome Powell addressed the Silicon Valley Bank and subsequent Signature Bank failures, assuring all depositors would be made whole with systems put in place to prevent the spreading of a larger banking crisis. By now, the failures of Silicon Valley Bank and Signature Bank seem to be dealt with on the surface, most recently with the acquisition of Silicon Valley Bank by First Citizens Bank. The question remains, have these efforts been sufficient to supply confidence and liquidity to the banking system and its stakeholders?

The Fallout Available liquidity in the banking system has become top priority as depositors look for security in an environment where the values of debt security portfolios have fallen. Because of this market-wide desire for liquidity, the normal exchange and borrowing between banks, typically guided by the federal funds target rate, has significantly reduced. This is causing banks to use the “discount window”. The Discount Window & The Bank Term Funding Program The discount window is a lending channel wherein financial institutions can borrow directly from the Federal Reserve (Fed), providing immediate cash for eligible collateral. This boosts market liquidity where it previously did not exist. While a great option on the surface, this is generally considered to be the “Lender of Last Resort”. The rates and costs are high relative to the market, to discourage use unless absolutely necessary. Where in the past this lending avenue has been sufficient to stopgap liquidity concerns, the Federal Reserve announced in March’s FOMC meeting the creation of a new “Bank Term Funding Program” that would act similarly to the discount window, except any collateral would be valued at par instead of its lower market value, artificially inflating the available funds to supply even more liquidity to the market. Providing Liquidity to the Market Within the past couple weeks, we have seen borrowing from the discount window at alarming levels, beyond those of the 2008 financial crisis. In the week ended Wednesday 3/22, banks borrowed an average of $117 billion each night, according to Fed data. That was up $32 billion from the prior week and surpassed the average $112 billion in the financial crisis of 2008, an indication of a severe lack of available liquidity.

The 2008 financial crisis, considered to be one of the most severe periods of reduced economic activity, was one marked by a credit and liquidity crunch brought on by failure of bad debt in the marketplace. During this time, financial institutions used the discount window to supplement where liquidity was unavailable.

If discount window borrowing levels are this much higher than those in 2008, what are the implications for the health of our banking system and the availability of capital in the market?

Is this a sign that we are potentially in a worse position than 2008?

Looking Ahead

Many banks and financial institutions have already taken steps toward tighter lending conditions because of liquidity concerns. Specific to commercial real estate, some institutions supplying credit to the market have already increased rates, lowered maximum LTVs, raised debt coverage requirements, or even temporarily withdrawn from lending activities. This does not bode well for those looking for financing moving forward. In 2023 alone, an estimated $162 billion of commercial real estate loans will come due and those looking to refinance may be faced with cash-in obligations or an inability to meet tighter lender standards. At this point, it is far too early to tell if these tighter lending conditions and increased discount window borrowing are an indication of a prolonged issue or a quick fix to a temporary problem, but their existence and severity now could spell immense challenges for debt dependent commercial real estate investments moving forward.


bottom of page