The Quiet Revolution in How We Rescue Banks

Tracy Alloway (0:02)

Bloomberg Audio Studios. Podcasts, radio, news.

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:22)

And I'm Joe Weisenthal.

Tracy Alloway (0:23)

Joe, do you remember what we were doing this time last year?

Joe Weisenthal (0:27)

Nope, not really.

Tracy Alloway (0:30)

I should say around this time last year.

But yes, I can't really even remember last week at this point. But in the middle of January, we recorded an episode on the discount window.

Joe Weisenthal (0:43)

Oh, on the discount window. Yes, I do. Why were we talking about the discount window? Just for the fun of it?

Tracy Alloway (0:47)

No, because borrowing was going up.

Joe Weisenthal (0:50)

Right.

Tracy Alloway (0:50)

Yes.

Joe Weisenthal (0:51)

Right. Yes. Okay.

Yes. So in February or something or maybe early March of last year. No, February, early March of last year, we did that episode about deposit rates and then that turned out to be very relevant. But even before that, you started writing about the rise in discount window borrowing.

Tracy Alloway (1:10)

Yes, that's right. I think I wrote something in December. I think the headline was like, billions in discount window borrowing suggests all is not well with banks, which turned out to be fairly true come March because we did see a mini banking crisis, banking drama, whatever you want to call it, the collapse of three banks, including Silicon Valley Bank. But since then, there has been this massive discussion about how to tweak all these emergency financing programs for banks, what they should actually look like, how do we want the lender of last resort system to operate, and what does it mean for banks? If they have to hold back additional collateral in order to access these programs, then what does it mean for them from a capital or a revenue standpoint?

So many things going on in the space right now. It's a little bit under the radar, but I think we should talk about it.

Joe Weisenthal (2:07)

Totally, it always is like there's this inherent challenge, right? Even with Silicon Valley Bank, even setting aside emergency borrowing, the thing I guess that people get anxious about is as soon as any financial institution makes moves to shore up liquidity, shore up finances, etc.

that becomes a signal to investors or depositors, whoever is like, oh, wait, why do they feel the need to shore up their finances? And then you become a target and you start worrying about the share price and equity, etc. And it feels like this is like an inherent challenge for regulators, which is, of course, you want banks to be proactive. You want banks to have plenty of liquidity. You want them to have equity cushions.

But if the act of doing so invites suspicions, then how do you get out of that puzzle?

Tracy Alloway (2:53)

Well, exactly. And I think this is most apparent with the discount window, where people talk about the stigma of accessing the discount window. And when you access it, it's supposed to be anonymous. The Fed doesn't publish who's actually tapping it until, I think, two years later.

But you start to see rumors swirl. In the case of last year, when we saw the discount window borrowings start to go up in December, I think that was the proximate time when people started to ask questions about, well, wait a second, what's going on with Signature?

What's going on with Silicon Valley Bank? That might have contributed to some of the deposit withdrawals that we eventually saw. So the super interesting thing now is that people are talking about reforming the discount window, as well as some other facilities. We saw the acting Comptroller of the Currency, Michael Hsu, also a former Odd Lots guest, talk about the idea of, well, maybe we're going to require banks to tap the discount window every once in a while, just so the stigma maybe reduces, but also they have the operational readiness to do it when they really need to.

Joe Weisenthal (3:59)

Can I say something? It's almost inappropriate for, no, it's borderline.

Tracy Alloway (4:03)

How are you going to make the discount window inappropriate? I'm curious now.

Joe Weisenthal (4:06)

So you know what I think whenever I hear this idea of, well, if you just get everyone to do it, there's no stigma.

Tracy Alloway (4:13)

Oh, I know exactly what you're going to say.

Joe Weisenthal (4:15)

I tweeted this once.

I always think about the scene in the movie Billy Madison, where the kid is really embarrassed because everyone can see that he peed his pants. And so who's that actor who's in it? The comedian?