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Fed Actions, US Banks Discount Window Use Prudent Amid Turmoil

Global Market	1099 VIEWS
Global Market
1099 VIEWS

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Tuesday, March 17, 2020 /05:04 PM / By Fitch Ratings / Header Image Credit: Dallas News

The decisive and coordinated Federal Reserve (the Fed) actions in response to recent extreme market volatility should allow U.S. banks and markets more time and increased flexibility to adjust to the unfolding coronavirus pandemic, Fitch Ratings says. The scope and scale of these actions reflect the determination of the Fed and other central banks to counteract the impact of the coronavirus pandemic on financial markets and shore up and improve USD liquidity abroad. Importantly, the Fed is encouraging banks to access the discount window, which Fitch would not view negatively in light of market disruptions.

The Fed's sweeping actions include:

1) reduction of fed funds rate to 0%;
2) elimination of bank reserve requirements;
3) encouragement for banks to utilize their capital and liquidity buffers;
4) encouragement for banks to use Fed intraday credit;
5) lowering of the discount rate to 0.25% and encouragement for banks to access the discount window;
6) lowering of pricing on standing U.S. dollar liquidity swap lines with certain foreign central banks; and
7) purchases of up to $700 billion in U.S. Treasuries and agency mortgage-backed securities.

These actions follow the Fed announcing its intention to shore up the Treasury repo markets with $1.5 trillion of repo operations on March 12.

Fitch views the totality of the Fed's actions as reflective of the disruption in markets. While we believe large U.S. banks have adequate capital and liquidity positions amid the stress, as evidenced by high absolute levels and the performance under regulatory stress testing, the Fed's actions should provide banks with more options to continue supporting clients and the economy, including through more accommodative access to the Fed discount window.

In this regard, Fitch would not consider accessing the Fed's discount window in and of itself negatively or as indicative of a weakness in a U.S. bank's liquidity management practices. We would expect that while banks have more flexibility to dip into management-targeted and regulatory-required capital and liquidity buffers, capital plans for the upcoming CCAR cycle should reflect the current market uncertainty. Moreover, the eight largest U.S. banks have already announced plans to cease share repurchases. We view this as prudent in light of the uncertainty and supportive of CET1 capital levels, with capital available to be used to lend during the economic slowdown caused by the coronavirus pandemic. We expect other U.S. banks to follow suit as the impact to the U.S. and global economy continues to expand.

The uncertainty around the impact of the coronavirus has unsettled the financial markets in general and the funding markets in particular. The degree of uncertainty, along with scope of the economic impact, is causing investors to seek safe havens such as cash. This behavior is reflected in reduced investor appetite for corporate and term debt, along with corporate treasurers desire to have more cash on hand.