JPMorgan Eyes Plan to Break Stigma of Fed’s Discount Window

(Bloomberg) -- A senior JPMorgan Chase (NYSE:JPM) & Co. executive said the largest U.S. bank planned to borrow funds through the Federal Reserve’s emergency lending facility in an exercise designed to break the stigma attached to a program that can scare investors and spark political attacks.

Jennifer Piepszak, JPM’s chief financial officer, said Tuesday the bank would borrow from the so-called discount window from time to time this year and had discussed the plan with regulators.

“We think this is an important step for us to take to break the stigma here,” Piepszak said during the firm’s investor day in New York.

The remarks come less than three weeks after Randal Quarles, the Federal Reserve’s vice chairman for banking supervision, spoke of the need to make it easier for banks to access emergency lending from the Fed.

Window Liquidity

The Fed’s discount window is meant to provide emergency liquidity to banks that otherwise have healthy balance sheets. In a cash crunch, banks can pledge collateral to the Fed in return for cash.

Banks have become extremely reluctant to use the facility because of the reaction it can provoke among investors, who may fear it reveals a more serious problem, and among politicians keen to attack taxpayer-funded bank bailouts.

“The discount window is meant to be used by healthy banks when it is needed,” Quarles said in a Feb. 6 speech. “While there has long been discussion about how the discount window is ‘broken’ because of stigma about using it, we know it is still an important part of firms’ contingency planning and preparations.”

Quarles also discussed in his speech how improving access to the discount window could also help enhance money-market liquidity by reducing the demand among banks to hold excess reserves parked at the Fed. That demand contributed to a shortfall of lending by banks into overnight funding markets in September, forcing the Fed to boost reserves with purchases of Treasury bills.

By making Treasuries more substitutable for reserves while still meeting liquidity requirements, Quarles’ plan might encourage banks to hold more Treasuries and fewer reserves.

Joseph Abate, a money-market strategist at Barclays (LON:BARC) Plc, wrote in a Feb. 12 note to clients that the Fed could help overcome the long-standing stigma attached to the facility by making it “significantly more attractive” for banks to pledge Treasuries for cash through the discount window.

(Updates with comment from JPM executive in third paragraph.)

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