Misconceptions about banks borrowing at the Discount Window may persist, but it's crucial to understand that this does not involve the creation of new money. Consequently, it is not Quantitative Easing (QE), it is not inherently bullish, and it only serves as a temporary solution.
Because no new money is being created, this process isn't inflationary either. It simply enables depositors to access their money in a timely fashion.
This mechanism provides the Federal Reserve with stability and the capacity to continue tightening without sparking a full-blown banking crisis, albeit temporarily.
The Fed closely monitors banks' liquidity situations to prevent bank runs and subsequent collapses. Banks wouldn't consider using this liquidity for any other purpose than ensuring depositors are made whole.
Recent news reported that approximately $120.93 billion was funneled into US money-market funds during the week leading up to March 15. Retail money constituted $20.15 billion of this increase, while institutional cash surged by $100.78 billion. This indicates that people are withdrawing money from their banks and investing in highly liquid securities with high credit ratings—a flight to safety.
This illustrates the decline in bank deposits and the rationale behind the Fed's funding program.
However, borrowing at the Discount Window carries a stigma, as market participants often view it as a sign of extreme system stress. The Continental Illinois debacle is often credited with creating this negative association.
Historically, overnight loans were more routine methods for banks to address occasional reserve shortfalls. Frequent reliance on this facility was always considered a bad sign.
Banks are generally reluctant to borrow from the discount window due to the associated stress that could trigger a bank run. To counteract this, the Fed won't disclose borrowers' names until a year after the loan.
The all-time high in borrowing at the Discount Window has implications for banks, leading them to halt lending and tighten their lending standards to increase liquidity organically through repaid loans. Goldman Sachs predicts a significant tightening of lending standards following this.
In summary, borrowing at the discount window is a last resort for banks. The Fed introduces this program out of necessity to provide temporary liquidity. The increase in the Fed's balance sheet is a temporary collateral and not free money for investment or lending purposes. The system is experiencing a liquidity squeeze, with negative YoY changes in M2 and dwindling cash reserves.
The money printer has not been reactivated!