Small banks fuel rise in borrowing from Fed’s discount window

By Orla McCaffrey

Falling cash balances at small banks are driving them to rely more heavily on the Federal Reserve’s facility for short-term loans as a source of liquidity. Domestic banks borrowed $7.2 billion from the discount window in the third quarter of 2022, the highest level in almost two years, according to Fed data…When banks have less cash on hand, they are more likely to rely on external funding sources, including the discount window, to cover short-term funding needs. That is particularly true for smaller banks, which are less sensitive to the perceived stigma that comes with using the discount window. “Big banks are reluctant to use the discount window because they fear that if it got out, the markets would view them at risk, and that would cost them more money in funding and possibly even be systemically dangerous,” said Karen Petrou, co-founder and managing partner of Federal Financial Analytics. “Small banks are much less exposed to markets.”