Five Steps to Discount Window Borrowing (2024)

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August 2024

Five Steps to Discount Window Borrowing
by Miles Green, Advanced Examiner, Community and Regional Safety and Soundness, Supervision, Regulation, and Credit, Federal Reserve Bank of Richmond, and Carla Thomas, Senior Manager, Supervision + Credit, Federal Reserve Bank of San Francisco

The Federal Reserve discount window¹ is a critical tool for banks to manage liquidity risk ² as well as a source of liquidity to the U.S. financial system. During times of stress, such as rapid deposit outflows or increased loan demand, certain borrowing lines can become unavailable, but the discount window remains a convenient and ready contingent source to meet the unexpected funding needs of banks. Nevertheless, a bank needs to take some formal actions to fully ensure discount window access, and bank management needs to understand the mechanics of discount window borrowing, even if there is no immediate need for liquidity. Additionally, the Federal Reserve continues to implement enhancements to discount window services. One enhancement is the new Discount Window Direct (DWD) online portal application, which offers additional convenience for establishing and managing funding arrangements. Is your institution ready if it needs contingency funding? This article provides five steps to follow to be prepared.

1. Complete and Update Legal Documents

A bank must have properly executed legal documents³ to ensure it is fully authorized and prepared to borrow from the discount window. A discount window borrower is required to complete the following agreements in Operating Circular No. 10 (OC-10) and return them to their local Federal Reserve Bank:

• Letter of Agreement: Evidence of a bank’s acceptance of the terms and conditions in OC-10
• Authorizing Resolutions for Borrowers: Evidence of an institution’s authorization to borrow from and pledge assets to a Federal Reserve Bank
• Official Authorization List: A list of individuals, including their titles, who are authorized to conduct transactions specified in the institution's Authorizing Resolutions for Borrowers
• Form of OC-10 Certificate: Information needed by a Federal Reserve Bank to make an effective Uniform Commercial Code (UCC)-1 financing statement filing against the borrower

While Federal Reserve Banks attempt to review these agreements as quickly as possible, timelines for when documents can be finalized and executed can vary depending on the accuracy and completeness of the agreements and when the institution’s board of directors is able to meet and approve the Authorizing Resolutions for Borrowers. Bank management is also encouraged to periodically review the Official Authorization List to be sure that the list of individuals who can act on behalf of the bank is current.

2. Establish Collateral Arrangements

The discount window accepts a wide variety of securities and loans for collateral.⁴ Therefore, bank management should discuss questions about collateral eligibility with their local Federal Reserve Bank contacts.

Eligible security types include U.S. Treasury securities and fully guaranteed agency securities, investment-grade private label mortgage-backed securities, and municipal and corporate bonds. Certain other types of securities less commonly owned by banks are also eligible. Securities can be pledged as quickly as the same day through the Fedwire Securities Service⁵ or the Depository Trust Company (DTC)⁶ once a bank completes the necessary documents and setup steps. Additionally, a variety of loan types are accepted as collateral and eligible for the Borrower-in-Custody (BIC) program. Loans must be pass-rated and current. The following documentation may be required as part of a bank’s application for the BIC program:⁷

• The internal loan risk rating policies and procedures of the bank
• The Electronic Collateral Questionnaire and Attestation (if applicable)
• The bank’s most recent audit or loan review
• A third-party custodian agreement (if applicable)

The initial BIC application and approval process may take up to 30 days before completion. Although the process often occurs more quickly, a bank should consider this time frame in contingency funding plan scenarios when urgency may be a factor. Occasionally, delays may occur if the local Federal Reserve Bank is unable to perfect a senior security interest in a bank’s pledged loans. Pledging loan collateral after approval should be completed by a bank within 60 days, and the Federal Reserve Bank generally processes the pledge listing submissions within two weeks. For collateral to be assigned, a bank needs to complete and submit UCC filings and a filing search, along with other applications and agreements. Furthermore, a bank must meet reporting and recordkeeping requirements on an ongoing basis to remain eligible for the BIC program and to ensure that pledged loans remain eligible collateral.

3. Understand and Document the Mechanics of Borrowing

It is important for banks to thoroughly document the internal operational procedures required to borrow from the discount window, along with the specific steps needed to request an advance. This includes:

• a current list of authorized individuals who are able to request advances.
• the relevant contact information for the local Federal Reserve Bank.
• details on the information required when making a request, such as a bank’s legal name, location, and American Bankers Association (routing) number; the requester’s telephone number; the amount of funds requested and number of days that the funds are needed.

The bank’s contingency funding plan should consider the short-term nature of borrowings — typically overnight, with stated maturities. At present, primary credit may be extended up to 90 days. Once a request is made with the local Reserve Bank, advances are typically posted at the time that Fedwire closes. Interest on advances is charged for 24 hours (or a multiple thereof, for multiday loans) on the basis of 365 days in a year.⁸

4. Test the Borrowing Process

It is important for a bank to test the borrowing process periodically to ensure that all legal documentation, authorizations, and borrowing mechanics are up to date. Testing also ensures that the bank has appropriate internal policies and procedures in place to inform staff about how to request borrowings. Test loans typically have a low dollar balance (minimum $1,000). While most banks test their discount window access at least annually, the appropriate frequency of testing depends on the risk and complexity of the organization.

5. Access Discount Window Direct and Other Online Resources

Banks can now access the discount window through an online portal. In January 2024, the Federal Reserve launched a new application called Discount Window Direct. DWD is a self-service application that banks can access through FedLine, enabling users to conveniently conduct discount window activities. The DWD online portal allows banks to request advances, make payments, send and receive messages, and review their outstanding loan balances at the discount window.

The DWD application is generally accessible 24 hours a day. Discount window advance and payment requests may be conducted by a bank on the DWD application during the local Reserve Bank’s business hours. Currently, advances can only be executed while FedLine is open and available. The discount window lending and payment function of the portal is closed during nonbusiness hours, although other functions remain active and available. The DWD application requires a bank to designate individuals with FedLine access. OC-10 authorized individuals with a current email address on file and existing FedLine credentials can ask their End User Authorization Contact (EUAC) to add DWD to their profile so they can access the DWD application. Detailed information regarding EUAC responsibilities is available on the EUAC support page⁹ and in the EUAC Reference Guide and Onboarding Kit, which is available via FedLine Home.

Any bank eligible for primary or seasonal credit (i.e., a bank meeting the eligibility criteria that has executed and submitted OC-10 agreements, received official access and credentials, and pledged collateral to its local Federal Reserve Bank) can use the DWD application to request advances and make payments. The minimum amount for an advance request is $1,000. Primary and seasonal credit advances may have an overnight maturity or a longer maturity based on discount window terms set by the local Federal Reserve Bank. There are no fees associated with using the DWD application or borrowing under primary credit or seasonal credit, and borrowers may prepay advances at any time without penalty.

A bank may maintain the option to request advances and to make payments by calling its local Federal Reserve Bank. However, the DWD application includes a variety of features designed to enhance the user experience. Banks can use the secure messaging functionality of the DWD application to communicate with their local Reserve Bank and initiate inquiries. Other features include viewing current and historical advance balances, the status of advances and payments, and a list of the bank’s authorized individuals in accordance with OC-10.

If the discount window is part of a bank’s contingency funding plans, bank staff can prepare to use it by having accurate authorization lists and collateral documentation. Local Federal Reserve Bank staff and the DWD application can help a bank seamlessly access the discount window. More information is available on the Federal Reserve’s Discount Window¹⁰ and Lending Central¹¹ web pages. In addition, the June 27, 2024, Ask the Fed session titled “Discount Window Operational Readiness”¹² supplements these other resources with a webinar by Federal Reserve System Credit Risk Management officials that further covers details related to the discount window and the DWD application.

• ¹ For more information about the discount window’s function and its borrowing programs, including eligibility criteria, see Pam Hendry and Ben Clem, “Federal Reserve Discount Window: What It Is and How It Works,” Community Banking Connections, Second Issue 2020, available at www.cbcfrs.org/Articles/2020/I2/federal-reserve-discount-window-what-it-is-and-how-it-works.
• ² See “Addendum to the Interagency Policy Statement on Funding and Liquidity Risk Management: Importance of Contingency Funding Plans,” available at www.federalreserve.gov/newsevents/pressreleases/files/bcreg20230728a1.pdf.
• ³ OC-10 legal agreements are available at www.frbdiscountwindow.org/Pages/Agreements/OC10_Agreements. Banks should reach out to their local Federal Reserve Bank contacts for clarification.
• ⁴ More information about eligible collateral is available at www.frbdiscountwindow.org/Pages/Collateral/collateral_eligibility, and more information about pledging collateral is available at www.frbdiscountwindow.org/Pages/Collateral/pledging_collateral.
• ⁵ Pledgers must establish a U102 account by contacting Federal Reserve Wholesale Operations Support; see www.frbservices.org/contactus/fedwire.html.
• ⁶ Securities are pledged to the local Reserve Bank’s DTC pledge account via DTC.
• ⁷ See www.frbdiscountwindow.org/Pages/General-Information/The-Discount-Window.
• ⁸ More details about the mechanics of borrowing are available at www.frbdiscountwindow.org/Pages/General-Information/Borrowing.
• ⁹ The support page is available at www.frbservices.org/resources/fedline-solutions/euac.html.
• ¹⁰ See www.frbdiscountwindow.org and www.frbdiscountwindow.org/GeneralPages/DWD_main for more information.
• ¹¹ The Lending Central page is available at www.frbservices.org/central-bank/lending-central.
• ¹² See the Ask the Fed session, “Discount Window Operational Readiness,” which was presented by Judith Hazen, Tom Fitzpatrick, and Wally Young on June 27, 2024, and is available at bsr.stlouisfed.org/askthefed/Home/DeliverFile/2404.