WEBVTT - The Quiet Revolution in How We Rescue Banks 0:00:02.560 --> 0:00:13.440 Bloomberg Audio Studios, Podcasts, radio News. 0:00:18.040 --> 0:00:21.320 Hello and welcome to another episode of the ad Blots podcast. 0:00:21.440 --> 0:00:22.800 I'm Tracy Alloway. 0:00:22.520 --> 0:00:23.040 And I'm Joe. 0:00:23.040 --> 0:00:24.200 Why isn't thal Joe? 0:00:24.360 --> 0:00:27.240 Do you remember what we were doing this time last year? 0:00:28.120 --> 0:00:28.800 Uh? 0:00:28.840 --> 0:00:29.680 Nope, not really. 0:00:30.240 --> 0:00:34.000 I should say around this time last year. But yes, 0:00:34.159 --> 0:00:37.200 I can't really even remember last week at this point. 0:00:37.280 --> 0:00:40.920 But in the middle of January we recorded an episode 0:00:41.080 --> 0:00:42.839 on the discount Yeah. 0:00:43.040 --> 0:00:45.680 Oh, on the discount window, Yes, I do. Why were 0:00:45.720 --> 0:00:47.000 we talking about the discount window? 0:00:48.000 --> 0:00:51.880 No, because borrowing was going up, right, Yes? Yeah? 0:00:52.120 --> 0:00:52.320 Right? 0:00:52.440 --> 0:00:55.960 Yes, okay, yes, so in like February or Sunday or 0:00:56.000 --> 0:00:59.320 maybe early January of last year. No, no, February March 0:00:59.320 --> 0:01:01.160 of last year. Like, we did that episode about like 0:01:01.160 --> 0:01:03.840 deposit rates, and then that turned out to be very relevant. 0:01:03.960 --> 0:01:08.479 But even before that, you started writing about the rise 0:01:08.680 --> 0:01:09.880 in discount window borrowing. 0:01:10.200 --> 0:01:13.160 Yes, that's right. I think I wrote something in December. 0:01:13.200 --> 0:01:17.000 I think the headline was like billions in discount window 0:01:17.040 --> 0:01:20.240 borrowing suggests all is not well with banks, which turned 0:01:20.280 --> 0:01:23.520 out to be fairly true come March because we did 0:01:23.600 --> 0:01:27.480 see a mini banking crisis, banking drama, whatever you want 0:01:27.480 --> 0:01:30.959 to call it the collapse of three banks, including Silicon 0:01:31.040 --> 0:01:35.200 Valley Bank. But since then there has been this massive 0:01:35.280 --> 0:01:40.720 discussion about how to tweak all these emergency financing programs 0:01:41.040 --> 0:01:44.320 for banks, what they should actually look like, how do 0:01:44.360 --> 0:01:48.600 we want the lender of last resort system to operate, 0:01:49.080 --> 0:01:51.280 and what does it mean for banks? You know, if 0:01:51.280 --> 0:01:55.040 they have to hold back additional collateral in order to 0:01:55.160 --> 0:01:57.760 access these programs, then what does it mean for them 0:01:57.800 --> 0:02:00.600 from you know, a capital or a revenue to point. 0:02:00.960 --> 0:02:03.360 So many things going on in the space right now. 0:02:03.600 --> 0:02:06.520 It's a little bit under the radar, but I think 0:02:06.560 --> 0:02:08.040 we should talk about it totally. 0:02:08.080 --> 0:02:11.519 It always is like there's like this inherent challenge, right 0:02:11.600 --> 0:02:14.240 and even with Silicon Valley Bank, even setting aside like 0:02:14.520 --> 0:02:18.480 emergency borrowing. You know, the thing I guess like that 0:02:18.760 --> 0:02:22.079 people get anxious about is as soon as any financial 0:02:22.120 --> 0:02:26.920 institution makes moves to shore up liquidity, show up finances, 0:02:26.960 --> 0:02:30.160 et cetera, that becomes a signal right to investors or 0:02:30.160 --> 0:02:32.520 depositors whoever, it's like, Okay, why do they feel the 0:02:32.600 --> 0:02:35.080 need to shore up their finances? And then you become 0:02:35.080 --> 0:02:36.840 a target and you start worry about the share price 0:02:36.880 --> 0:02:39.320 and equity et cetera. And it feels like this is 0:02:39.360 --> 0:02:42.680 like an inherent challenge for regulators, which is, of course, 0:02:42.680 --> 0:02:45.520 you want banks to be proactive, you want banks to 0:02:45.560 --> 0:02:48.400 have plenty of liquidity, you want them to have equity cushions. 0:02:48.720 --> 0:02:52.200 But if the act of doing so invites suspicions, then 0:02:52.200 --> 0:02:52.760 how do you get. 0:02:52.680 --> 0:02:53.360 Out of that puzzle? 0:02:53.480 --> 0:02:55.760 Well, exactly, And I think this is most apparent with 0:02:55.919 --> 0:02:58.800 the discount window, where people talk about the stigma of 0:02:58.919 --> 0:03:02.519 accessing the discunt window, and you know, when you access it, 0:03:02.520 --> 0:03:05.680 it's supposed to be anonymous. The FED doesn't publish who's 0:03:05.800 --> 0:03:09.680 actually tapping it until I think two years later. But 0:03:09.919 --> 0:03:13.120 you start to see rumors swirl. In the case of 0:03:13.280 --> 0:03:16.400 last year, when we saw the discount window borrowing start 0:03:16.440 --> 0:03:19.160 to go up in December, I think that was the 0:03:19.320 --> 0:03:22.760 proximate time when people started to ask questions about like, well, 0:03:22.760 --> 0:03:25.720 wait a second, what's going on with Signature, what's going 0:03:25.720 --> 0:03:28.440 on with Silicon Valley Bank. That might have contributed to 0:03:28.520 --> 0:03:31.280 some of the deposit withdrawals that we eventually saw. So 0:03:31.400 --> 0:03:34.400 the super interesting thing now is that people are talking 0:03:34.400 --> 0:03:37.960 about reforming the discount window as well as some other facilities. 0:03:38.320 --> 0:03:41.880 We saw the acting Comptroller of the Currency Michael Sue, 0:03:42.000 --> 0:03:45.240 also a former All Blots guest, talk about the idea 0:03:45.280 --> 0:03:48.640 of like, well, maybe we're going to require banks to 0:03:48.800 --> 0:03:51.800 tap the discount window every once in a while, just 0:03:51.840 --> 0:03:55.320 so the stigma maybe reduces, but also they have the 0:03:55.480 --> 0:03:58.400 operational readiness to do it when they really need to. 0:03:59.240 --> 0:04:03.160 Can I say it's almost inappropriate? For no, it's it's 0:04:03.240 --> 0:04:04.040 it's borderline. 0:04:04.080 --> 0:04:06.600 Are you gonna make the discount window inappropriate? I'm curious? 0:04:06.640 --> 0:04:08.520 So you know what I think whenever, like I hear 0:04:08.600 --> 0:04:10.600 this idea of like, well, if you just get everyone 0:04:10.680 --> 0:04:13.200 to do it, there's no there's no stock. 0:04:13.280 --> 0:04:15.280 Oh, I know exactly what you're gonna say. 0:04:15.400 --> 0:04:16.440 I tweeted this one. 0:04:16.960 --> 0:04:20.359 I always think about the scene in the movie Billy 0:04:20.440 --> 0:04:24.680 Madison where like the kid is really embarrassed because everyone 0:04:24.680 --> 0:04:27.720 can see that he pat his pants and so wait, 0:04:27.720 --> 0:04:28.880 who's that actor who's in it? 0:04:28.920 --> 0:04:30.520 That fit the comedian Adam Sandler. 0:04:30.560 --> 0:04:33.359 Adam Sandler's like, oh, he like splashes a bunch of 0:04:33.360 --> 0:04:35.600 water on his own pants, and so he's like, oh, 0:04:35.680 --> 0:04:38.360 everyone and everyone around has water on their own pants. 0:04:38.400 --> 0:04:41.160 There's nothing embarrassing about it. And in my mind that's 0:04:41.400 --> 0:04:44.599 I'm Sorry, maybe I have a juvenile humor. That's always 0:04:44.640 --> 0:04:47.040 where my mind goes. If you have everyone do it, 0:04:47.120 --> 0:04:48.760 no one can be embarrassed about doing it. 0:04:49.120 --> 0:04:52.800 Okay, Well, on today's episode, why requiring banks to tap 0:04:52.839 --> 0:04:55.719 the discount window is the equivalent of splashing your pants 0:04:55.760 --> 0:04:56.239 with water? 0:04:57.560 --> 0:04:59.160 That's gonna be the title of this episode. 0:04:59.160 --> 0:05:01.840 Excellent. We really do have the perfect guest. It's someone 0:05:01.880 --> 0:05:04.200 we've wanted to get on the podcast for a long time, 0:05:04.279 --> 0:05:06.120 and I don't think he's been on before. 0:05:06.160 --> 0:05:06.320 Though. 0:05:06.760 --> 0:05:10.160 We're going to be speaking with Stephen Kelly, Associate director 0:05:10.240 --> 0:05:14.080 of Research at the Yale Program on Financial Stability. So, Steven, 0:05:14.120 --> 0:05:15.520 thank you so much for coming on all. 0:05:15.440 --> 0:05:18.159 Thoughts, happy to be here and talk about Billy Madison. 0:05:19.960 --> 0:05:24.080 So how much did the banking drama of last year 0:05:24.520 --> 0:05:29.440 change attitudes towards emergency lending facilities? I guess another way 0:05:29.440 --> 0:05:32.320 of asking the question is do we think that all 0:05:32.400 --> 0:05:36.800 these lender of last resort type things actually stood up 0:05:37.240 --> 0:05:38.600 to the test last year? 0:05:39.480 --> 0:05:42.400 Yeah? So it's a tricky question because obviously what comes 0:05:42.400 --> 0:05:45.160 after these crises is you go, why didn't it work? Right? 0:05:45.600 --> 0:05:48.920 It's there, the Fed can mint money. Why doesn't it work? 0:05:49.160 --> 0:05:52.200 You know? Why didn't SVB just post everything at the window. 0:05:52.240 --> 0:05:54.280 And we can get into the various reasons about that, 0:05:54.720 --> 0:05:58.400 but basically it's hopeless to say, oh, the discount window 0:05:58.480 --> 0:06:00.880 is going to work once you have name that's in 0:06:00.920 --> 0:06:03.320 the headlines, and that's sort of the pressure we put 0:06:03.360 --> 0:06:05.680 on it. Sometimes what the discount window is great for 0:06:06.400 --> 0:06:09.240 is sort of a macro story. It's great for contagion. 0:06:09.760 --> 0:06:12.920 It's great for maybe a community bank that it isn't 0:06:12.960 --> 0:06:16.039 facing the same kind of headline risks. It's never gonna 0:06:16.080 --> 0:06:18.800 save that bank that's in the headlines, and we can 0:06:18.839 --> 0:06:21.159 go into all the reasons about why, but so much 0:06:21.160 --> 0:06:24.960 of the franchise value just gets destroyed so fast. And 0:06:25.000 --> 0:06:28.320 when you're talking about replacing all your depositors, well, what 0:06:28.480 --> 0:06:31.080 is a bank but you know a collection of its depositors. 0:06:31.520 --> 0:06:33.040 So you know, you can put all the money you 0:06:33.040 --> 0:06:35.040 want in the window, but it's never gonna save that bank. 0:06:35.080 --> 0:06:36.680 And that's just too much pressure on the window. 0:06:37.560 --> 0:06:43.440 Can good banks fail by taking on these counter signals 0:06:43.440 --> 0:06:46.039 to the market, So, whether it's going to the FED 0:06:46.320 --> 0:06:49.800 and trying to get additional liquidity, whether it's doing an 0:06:49.800 --> 0:06:53.359 equity sale at some point just to create that greater 0:06:53.440 --> 0:06:58.560 equity cushion. If the bank is fundamentally sound, can simply 0:06:58.880 --> 0:07:02.200 expressing consarn be enough to bring it down because it 0:07:02.200 --> 0:07:04.000 does seem like, you know, people don't want to send 0:07:04.000 --> 0:07:07.240 that signals. Or ultimately, if the bank is good, then 0:07:07.279 --> 0:07:09.440 these are good moves to take and they'll survive it. 0:07:10.040 --> 0:07:12.000 Yeah. The biggest thing is if you can't get capital. 0:07:12.040 --> 0:07:15.080 I mean capital is what protects the deposit layer of 0:07:15.120 --> 0:07:17.160 the balance sheet. So if you can't get capital as 0:07:17.160 --> 0:07:20.200 a bank, you're out of business. So SVB comes out 0:07:20.280 --> 0:07:23.160 March eighth last year with an eight K that says, oh, 0:07:23.200 --> 0:07:24.760 you know, we were kind of looking at raising two 0:07:24.760 --> 0:07:27.440 point twenty five billion. We have five hundred million of commitment. 0:07:27.520 --> 0:07:30.480 Like that was enough to say, Okay, they gave an 0:07:30.520 --> 0:07:32.360 inside look at the balance sheet and nobody wanted it. 0:07:32.400 --> 0:07:34.720 So it wasn't that they were raising capital. It was 0:07:34.760 --> 0:07:36.240 that they announced that there was this gap. 0:07:36.400 --> 0:07:38.360 Yeah, if they had come out on March eight and 0:07:38.400 --> 0:07:41.120 said Warren Buffett is investing two point five billion, we 0:07:41.120 --> 0:07:43.040 would still have SVB today, got it. 0:07:43.520 --> 0:07:46.040 Maybe this is a good place to sort of back 0:07:46.120 --> 0:07:50.600 up and dive into what exactly happened with SVB. So 0:07:50.920 --> 0:07:54.480 there seems to have been a reluctance or an inability 0:07:54.800 --> 0:07:59.360 to tap the discount window soon enough. But we also 0:07:59.480 --> 0:08:02.280 know in retrospect, with the benefit of hindsight, that they 0:08:02.320 --> 0:08:06.000 were tapping another emergency. Well, oh, I should be careful here. 0:08:06.360 --> 0:08:09.680 It's not really supposed to be an emergency lending facility. 0:08:10.040 --> 0:08:14.320 I'm talking about the fhlb's, the Federal Home Loan banks. 0:08:15.000 --> 0:08:17.120 We used to call these, by the way, we used 0:08:17.120 --> 0:08:20.160 to joke in like two thousand and nine that fhlb 0:08:20.320 --> 0:08:24.520 stood for free Hubris loans for banks or find huge 0:08:24.600 --> 0:08:25.920 lumps of bucks. 0:08:25.800 --> 0:08:28.560 Like I love to find huge lumps of bucks. 0:08:28.680 --> 0:08:30.600 But anyway, I mean, this is a facility. It was 0:08:30.640 --> 0:08:35.400 supposed to facilitate home ownership and help banks do mortgages 0:08:35.440 --> 0:08:38.280 for people, but it sort of transformed to become an 0:08:38.320 --> 0:08:41.840 alternate emergency lending facility, and we should definitely talk about why. 0:08:42.120 --> 0:08:45.760 But SVB was basically tapping that instead of the discount window. 0:08:45.920 --> 0:08:49.160 So walk us through like what we saw from that 0:08:49.240 --> 0:08:52.000 particular bank in terms of the choices they made to 0:08:52.200 --> 0:08:53.880 access different types of liquidity. 0:08:54.280 --> 0:08:57.080 Yeah, so we call the fhlb's the flubs, which they 0:08:57.120 --> 0:09:00.840 don't love, but we'll deal it anyways, So I think 0:09:01.000 --> 0:09:04.560 it's not unique to SVB that they sort of relied 0:09:04.640 --> 0:09:07.160 on the fhlbs. You know, there was an SNL sketch 0:09:07.280 --> 0:09:10.200 after two thousand and eight during the original stress test 0:09:10.280 --> 0:09:12.280 where they they sort of did a bit like the 0:09:12.320 --> 0:09:14.840 stress test was an actual exam that banks had to take, 0:09:15.400 --> 0:09:18.560 and you know, City Group kept answering government bailout to 0:09:18.559 --> 0:09:22.640 all the questions and that's never saw that. That's sort 0:09:22.640 --> 0:09:26.120 of what happened with the fhlbs, particularly prior to March 0:09:26.160 --> 0:09:28.760 and prior to you know, the supervisory pressure we've seen 0:09:28.800 --> 0:09:30.720 since where if you asked the bank, hey, what do 0:09:30.760 --> 0:09:32.200 you do if you really get pinched to go, well, 0:09:32.240 --> 0:09:33.760 we'll go to the FLUB. You know, we have a 0:09:33.760 --> 0:09:37.480 great relationship with the fhlbs. I mean that's another piece 0:09:37.520 --> 0:09:40.080 is that these fhlbs are a lot more commercial in 0:09:40.160 --> 0:09:42.319 nature than the FED. But so that was sort of 0:09:42.360 --> 0:09:46.199 the contingency funding plan written large across the system, and 0:09:46.760 --> 0:09:48.720 you know, it sort of works if you need a 0:09:48.800 --> 0:09:51.360 billion or five billion if you're SVB. It doesn't work 0:09:51.360 --> 0:09:53.920 if you need forty billion because the fhlb's they take 0:09:53.960 --> 0:09:57.360 government collateral, they take mortgage collateral. If you need to 0:09:57.360 --> 0:09:59.920 start posting, you know, commercial and industrial loans, something like 0:10:00.440 --> 0:10:02.679 corporate bonds. You got to go to the FED. And 0:10:02.720 --> 0:10:05.480 if you're not set up at the FED, because it's 0:10:05.520 --> 0:10:07.520 annoying to do that, it's too expensive, you don't want 0:10:07.520 --> 0:10:10.200 to leave collateral there, whatever the reason, you run out 0:10:10.240 --> 0:10:10.560 of time. 0:10:10.800 --> 0:10:12.600 So some things just aren't set up with the FED, 0:10:12.600 --> 0:10:13.520 like it's too annoying. 0:10:13.880 --> 0:10:18.640 Exactly what if that's the operational readiness argument for making 0:10:18.679 --> 0:10:22.200 them splash water on their pants, slash go to the 0:10:22.280 --> 0:10:23.040 discount window. 0:10:23.440 --> 0:10:27.079 Right, So SPB literally couldn't get collateral to the FED 0:10:27.160 --> 0:10:29.959 in time before the run is out. Again, the SVB 0:10:30.040 --> 0:10:33.160 story was over, so it didn't matter. But it's useful 0:10:33.200 --> 0:10:36.320 to be ready to go at the FED because they 0:10:36.360 --> 0:10:39.600 can take effectively your whole balance sheet. Basically any asset 0:10:39.640 --> 0:10:42.319 a bank will have you can put to the window. 0:10:42.600 --> 0:10:45.320 I mean, that's why it exists. And the FHLBS, you know, 0:10:45.400 --> 0:10:48.160 because of this sort of housing origin and whatever other reasons, 0:10:48.400 --> 0:10:49.560 they just don't have that range. 0:10:49.840 --> 0:10:52.560 The same thing happened at Signature, by the way, and 0:10:52.640 --> 0:10:54.760 I think there was a really good speech by a 0:10:54.760 --> 0:10:56.560 FED official. I can't remember who it was, but they 0:10:56.600 --> 0:11:00.440 were talking about how it had basically been five years 0:11:00.440 --> 0:11:04.520 since Signature tapped the discount window, and when it came 0:11:04.679 --> 0:11:07.880 time to tap again, you know, things are blowing up. 0:11:07.960 --> 0:11:12.240 You need to access emergency liquidity. The Signature staff didn't 0:11:12.360 --> 0:11:17.079 really understand the rules around collateral eligibility and what they 0:11:17.160 --> 0:11:19.880 had to do in order to actually go to the 0:11:19.920 --> 0:11:22.880 window and borrow money. So I can see the argument 0:11:22.920 --> 0:11:25.440 for why you would want people to like practice it. 0:11:25.679 --> 0:11:29.920 Hey, what happened to Signature who took over their assets again? Well, 0:11:31.960 --> 0:11:34.960 I'm making a bit of a joke there that I'm 0:11:34.960 --> 0:11:35.680 aware that. 0:11:35.880 --> 0:11:38.120 I'll have to check my Bloomberg. I think there's some 0:11:38.240 --> 0:11:39.640 sleepy bank. No one's ever heard of it. 0:11:39.679 --> 0:11:42.720 Yeah, and why c b Okay, So no, this really, 0:11:42.800 --> 0:11:45.360 I mean that sort of blew my mind at the time, 0:11:45.480 --> 0:11:50.239 that like, here are these institutions, and I guess that weekend, obviously, 0:11:50.440 --> 0:11:53.400 I guess the Fed or the Treasury determined that there 0:11:53.440 --> 0:11:56.680 was some sort of emergency aspect of it. And we 0:11:56.720 --> 0:11:58.600 all know that, like there was the sort of rescue 0:11:58.600 --> 0:12:01.480 and they opened up this new program, the BTFP, which 0:12:01.520 --> 0:12:03.400 we'll talk about. But it sort of blew my mind 0:12:03.400 --> 0:12:05.040 that you could have this crisis and part of it 0:12:05.080 --> 0:12:07.320 is like, well, what time is it? What time is 0:12:07.360 --> 0:12:10.800 like the window actually open? Can we reopen the window? 0:12:10.920 --> 0:12:13.160 Like that sort of blew my mind. So what happened 0:12:13.240 --> 0:12:16.360 immediately or maybe not immediately, but in the wake of 0:12:16.440 --> 0:12:18.400 all of this. So we've sort of talked about the 0:12:18.520 --> 0:12:20.840 run up and how they're like, what changes did we 0:12:20.880 --> 0:12:24.240 see regulatory wise in the wake of the SVB and 0:12:24.280 --> 0:12:25.560 signature disaster. 0:12:25.960 --> 0:12:29.040 So the biggest change, which is long overdue, is you 0:12:29.120 --> 0:12:31.640 got to post more collateral at the window. It's this 0:12:31.760 --> 0:12:33.960 term prepositioning that we're starting to hear more and more of. 0:12:34.480 --> 0:12:37.240 And you know, you got to practice, and we're hearing 0:12:37.280 --> 0:12:39.480 more from regulators that they would like a little more 0:12:39.679 --> 0:12:42.720 practice than this, you know, and this is probably the 0:12:42.760 --> 0:12:44.920 direction that supervision needs to go of, like, Hey, if 0:12:44.960 --> 0:12:47.960 you're not practicing, we're gonna we're gonna docu. If you 0:12:48.000 --> 0:12:49.920 can't show that you can show up at the window 0:12:49.960 --> 0:12:51.599 and get liquidity when you need it, we're going to 0:12:51.679 --> 0:12:54.440 docu from a supervisory perspective. But really, it's been a 0:12:54.440 --> 0:12:57.080 lot of pressure to send more collateral to the FED. 0:12:57.120 --> 0:12:59.720 There is something like three trillion dollars of collateral at 0:12:59.720 --> 0:13:01.600 the FED. We don't get like daily updates on this, 0:13:01.720 --> 0:13:04.640 but it's in that vicinity and we know what's been growing. 0:13:05.160 --> 0:13:08.360 And we're also hearing from regulators that there's maybe some 0:13:08.600 --> 0:13:11.280 reforms to be had and some new liquidity measures to take. 0:13:27.000 --> 0:13:31.640 Is pre positioning a synonym basically for encumbrance. So the 0:13:31.760 --> 0:13:33.600 idea that I have a certain number of assets on 0:13:33.640 --> 0:13:35.920 my balance sheet, I'm going to have to use more 0:13:35.960 --> 0:13:38.920 of those or set more of those aside at the 0:13:38.960 --> 0:13:42.800 Central Bank in order to satisfy these new requirements, and 0:13:42.840 --> 0:13:45.600 therefore they're going to be less available to me to 0:13:45.960 --> 0:13:49.400 do stuff, do you know, creative and hopefully revenue generating 0:13:49.440 --> 0:13:51.920 things with them, like repo them out or something like that. 0:13:52.520 --> 0:13:55.959 So yes, that's that's part of the story. And the 0:13:56.040 --> 0:13:57.360 other thing I think about is like banks have a 0:13:57.400 --> 0:14:00.400 lot of loans, so those are just sitting there, goes 0:14:00.440 --> 0:14:03.080 to the FED. You get over the hurdles of moving up, 0:14:03.200 --> 0:14:05.440 Like it's not like you're repolling out your loans necessarily 0:14:05.520 --> 0:14:07.880 as a community bank. Just house them at the FED, 0:14:08.160 --> 0:14:11.560 don't leave them at the fhlb's send them to the FED. 0:14:12.040 --> 0:14:13.840 And so that's gonna be a piece of it. The 0:14:13.880 --> 0:14:17.360 other thing that may come here is some sort of 0:14:17.480 --> 0:14:20.520 carrot with that stick. So the hardest thing about the 0:14:20.560 --> 0:14:23.160 discount window is that it really can't be any cheaper. 0:14:23.520 --> 0:14:27.000 And that's the stigma, is that it's really expensive. So 0:14:27.120 --> 0:14:30.480 if you have a deposit which is yielding zero and 0:14:30.560 --> 0:14:32.760 you've got to go to the window, the Fed can say, oh, 0:14:32.800 --> 0:14:34.600 look it's just the top of the Fed funds rate, 0:14:34.920 --> 0:14:37.520 but that's still you know, right now, it's five hundred 0:14:37.520 --> 0:14:39.040 BIPs more than more than deposit. 0:14:39.120 --> 0:14:39.520 I see. 0:14:39.760 --> 0:14:42.560 So even if it's just like it's just you're just borrowing, 0:14:42.600 --> 0:14:45.040 even if it's just at the Fed funds raids, yeah, 0:14:45.120 --> 0:14:47.720 like really banks are borrowing from their deposits. That's way 0:14:47.760 --> 0:14:49.440 more or you know, whatever it is now it's not 0:14:49.600 --> 0:14:51.920 zero anymore, but whatever the typical deposit is. 0:14:52.560 --> 0:14:54.960 Right, So it's it's incredibly expensive. It would be great 0:14:54.960 --> 0:14:56.240 if you were Coca Cola and you could go to 0:14:56.320 --> 0:14:58.640 the discount window, but you can't. So the way to 0:14:58.680 --> 0:15:01.080 destigmatize is to offer some sort of caret and if 0:15:01.160 --> 0:15:04.200 you can say, hey, if you preposition collateral, we'll give 0:15:04.200 --> 0:15:06.680 you some credit towards your LCR, or we'll give you 0:15:06.760 --> 0:15:08.560 some credit towards these other things. So you can self 0:15:08.600 --> 0:15:11.320 ensure less and do more profitable things with your balance sheet. 0:15:11.800 --> 0:15:14.720 That's maybe a viable route, and that's why preposition is 0:15:14.800 --> 0:15:15.760 sort of coming in vogue. 0:15:15.960 --> 0:15:18.160 Wait, can you talk a little bit more about the 0:15:18.320 --> 0:15:22.320 rates available at I guess specifically the discount window versus 0:15:22.640 --> 0:15:26.320 the Fhlb's ye, because this is something I never like 0:15:27.040 --> 0:15:31.960 quite understood. So if you go to the FHLB the FLUB, 0:15:32.480 --> 0:15:34.880 I think they actually like they do something where they 0:15:34.920 --> 0:15:39.760 do look at unrealized gains and losses on your securities 0:15:39.800 --> 0:15:43.040 in order to see whether or not you're a viable 0:15:43.520 --> 0:15:46.320 entity to be lending money too. So if you are 0:15:46.440 --> 0:15:49.800 like super stressed, they might not actually lend you money. 0:15:49.800 --> 0:15:52.000 But on the other hand, it seems like everyone kept 0:15:52.560 --> 0:15:55.040 going to them, and I'm assuming it's because like the 0:15:55.160 --> 0:15:57.880 rate of borrowing is more attractive than the discount rate. 0:15:58.280 --> 0:15:59.840 Yeah, so that's a big piece of it. And it's 0:15:59.840 --> 0:16:02.920 the confidentiality. So the valuation thing you're thinking of is 0:16:02.920 --> 0:16:05.200 only unavailable for sales. So that's part of the story 0:16:05.280 --> 0:16:07.080 is you can still hide the losses and help the 0:16:07.120 --> 0:16:11.280 maturity to some degree, but the pricing is definitely advantageous 0:16:11.320 --> 0:16:14.920 and nobody can write that story that you wrote last February, Tracy, 0:16:15.200 --> 0:16:16.840 where you're saying, okay, it looks like. 0:16:16.880 --> 0:16:21.200 There's December, please sorry, give me my extra two months. 0:16:21.480 --> 0:16:24.440 I think you told these banks to borrow. You know, 0:16:24.680 --> 0:16:26.760 nobody can write that story because the data is not 0:16:26.840 --> 0:16:29.120 it's not public data. We don't get a weekly balanced 0:16:29.120 --> 0:16:30.120 sheet from the Fed. 0:16:30.200 --> 0:16:31.520 Why isn't it public. 0:16:31.240 --> 0:16:32.680 Because you don't want to run on the bank. 0:16:32.680 --> 0:16:36.600 Because the fhlb's are a private entity, they're cooperative basically 0:16:36.680 --> 0:16:40.280 put together by the banks, and so that's a piece 0:16:40.280 --> 0:16:42.880 of the stigma. And the funding is really good because 0:16:43.480 --> 0:16:45.200 this is you know, it's a GSC, it's a government 0:16:45.240 --> 0:16:48.600 sponsored enterprise. So when you have a crisis and there's 0:16:48.600 --> 0:16:51.800 a flight into money market government money market funds, what 0:16:51.840 --> 0:16:53.480 can they buy? They can buy treasuries and they can 0:16:53.520 --> 0:16:56.720 buy FHLB debt and so you really have you have 0:16:56.800 --> 0:17:01.480 cheap issuance. And the FHLB pays out their earnings to members. 0:17:01.960 --> 0:17:03.800 They don't pay it out based on you know, the 0:17:03.840 --> 0:17:06.160 biggest bank it's the biggest or you know, everybody gets 0:17:06.200 --> 0:17:10.280 an eqal share. Whoever borrows is who gets the earnings back. 0:17:10.320 --> 0:17:13.439 So it's it's literally you know, a rebate to anybody 0:17:13.480 --> 0:17:16.480 who borrows. And so what we see as the fhlbs 0:17:16.520 --> 0:17:20.720 are always competitive with the FED, often cheaper, and you 0:17:20.760 --> 0:17:22.400 know that drives part of the story too, is that 0:17:22.480 --> 0:17:24.320 they just have this built in discount. 0:17:24.720 --> 0:17:27.560 So one other thing that's happened recently is the FED 0:17:27.600 --> 0:17:31.240 has basically said they're going to end the BTFP program, 0:17:31.280 --> 0:17:33.479 I think in March, which was when it was supposed 0:17:33.520 --> 0:17:36.639 to end. And I was kind of amazed at some 0:17:36.760 --> 0:17:40.359 of the arbitrage story that came out a little while ago, 0:17:40.480 --> 0:17:43.240 the idea that banks could basically get free money from 0:17:43.240 --> 0:17:45.680 the FED because of the way the rates were set 0:17:45.840 --> 0:17:50.240 on the BTFP versus other financing sources. How big of 0:17:50.280 --> 0:17:53.320 an issue was that, How much did that play into 0:17:53.359 --> 0:17:57.000 the decision to end it? And then I guess lastly, 0:17:57.400 --> 0:18:00.840 given what we're seeing now with one particularler New York 0:18:01.000 --> 0:18:03.960 based bank and the troubles, there is there a possibility 0:18:03.960 --> 0:18:05.960 that the BTFP gets extended. 0:18:07.000 --> 0:18:10.320 So I would say it's unlikely absent a wider crisis. 0:18:10.760 --> 0:18:14.160 The arbitrage story isn't really it's not likely that that's 0:18:14.200 --> 0:18:16.679 why it was ended. It was ended because things you know, 0:18:16.840 --> 0:18:19.960 NYCB notwithstanding and things have been calmer. There's not really 0:18:20.200 --> 0:18:23.840 the unusual and exigen circumstances the FED looks for. I 0:18:23.840 --> 0:18:26.040 think it's probably why we found out in January that 0:18:26.080 --> 0:18:27.480 it was going to end in March and why they 0:18:27.520 --> 0:18:29.879 announced the rate change. Yeah. So the way the rate 0:18:29.920 --> 0:18:32.560 thing worked is the BTFP is for one year. The 0:18:32.600 --> 0:18:35.600 FED charged one year OIS plus ten basis points, So 0:18:35.640 --> 0:18:37.720 that was sort of the penalty built in. But what 0:18:37.880 --> 0:18:40.080 they're lending is reserves, and if you are a bank, 0:18:40.119 --> 0:18:41.960 you can leave those reserves at the FED, not do 0:18:42.040 --> 0:18:44.320 anything with them, and earn interest on reserves. So this 0:18:44.359 --> 0:18:46.080 is sort of a new post two thousand and eight 0:18:46.200 --> 0:18:49.720 thing that actually weighs into the expenses of the FED. 0:18:49.800 --> 0:18:53.720 So when OIS plus ten BIPs drops below ior, you know, 0:18:53.760 --> 0:18:55.920 you could just run that trade infinitely as long as 0:18:55.920 --> 0:18:58.480 you have the collateral and just sort of harvest the 0:18:58.480 --> 0:18:59.720 carry basically. 0:19:00.160 --> 0:19:04.359 For listeners and for myself. Remind me again, so what 0:19:04.560 --> 0:19:07.760 exactly the BTFP stipulated. It was rolled out as part 0:19:07.760 --> 0:19:10.480 of the SVB emergency. I get, you know, there were 0:19:10.520 --> 0:19:14.280 all these concerns about these losses on the whold to 0:19:14.400 --> 0:19:18.199 market book, But remind me what the actual design of 0:19:18.200 --> 0:19:18.919 that program was. 0:19:19.040 --> 0:19:20.959 So the biggest thing about the BTFP is that it 0:19:21.000 --> 0:19:23.320 took collateral at par value. 0:19:23.480 --> 0:19:25.480 Right par and so there was a lot of these 0:19:25.520 --> 0:19:28.400 treasuries in particularly in SVB cases were like way off 0:19:28.400 --> 0:19:29.280 parwer because rates. 0:19:29.080 --> 0:19:31.880 And China right. And so the critique at the time was, oh, 0:19:31.920 --> 0:19:34.280 my gosh, this is not how central banking works. You 0:19:34.280 --> 0:19:36.679 can't just lend it whatever value, blah blah blah. And 0:19:36.720 --> 0:19:40.720 that was pretty overblown because the BTFP still charges a 0:19:40.800 --> 0:19:42.480