The Speed of Discount Window Lending: A Look Back at 1985

Over the past year, Federal Reserve officials have placed renewed emphasis on ensuring that depository institutions are able to execute discount window loans at a rapid pace if necessary.See this February 2024 speech by Michael Barr, the Federal Reserve’s vice chair for supervision. This focus has come in response to the historically fast and large deposit runs that occurred in March 2023. After failing to secure sufficient funding to cover withdrawals, certain banks made urgent requests for discount window loans but were not prepared to execute those loans quickly.See the April 2023 report Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank (PDF), p. 4, by the Board of Governors of the Federal Reserve System and the April 2023 report FDIC’s Supervision of Signature Bank (PDF), p. 12, by the Federal Deposit Insurance Corp.

This blog post looks back at a previous episode in which the Fed received urgent loan requests from institutions that were not prepared to borrow from it. In Ohio and Maryland in 1985, private deposit insurance funds for savings banks and savings and loans (together, thrifts) appeared at risk of failing, leading to widespread and severe deposit runs.At this point in history, depending on state law, state-chartered thrifts had the option of not joining the Federal Savings and Loan Insurance Corp.

During this episode, the Fed took extraordinary steps to speed loans to affected thrifts, but ultimately the process of pledging collateral was significantly time consuming. In the end, both states temporarily suspended banking activity for all privately insured institutions—a common pre-Fed response to banking crises that the discount window was intended to help prevent. These thrifts’ experience in 1985 underscores that pledging collateral can be the most time-consuming step in executing a discount window loan, consistent with efforts today to encourage banks to pre-position collateral in advance of borrowing needs.

Ohio Thrift Crisis

In March 1985, the Home State Savings Bank in Cincinnati lost 23% of its deposits over three days after it announced a loss related to the failure of a securities dealer.See Cleveland Fed President Karen Horn’s statement, p. 252, and Federal Home Loan Bank Board Chair Edwin Gray’s statement, p. 223, before the Subcommittee on Commerce, Consumer and Monetary Affairs of the Committee on Government Operations, U.S. House of Representatives, on April 3, 1985. The incentive to run was strong even for small depositors because Home State’s financial problems threatened to bankrupt the private deposit insurance fund, the Ohio Deposit Guarantee Fund (ODGF), through which Home State was insured.

The ODGF’s problems then led to a generalized run on many of its roughly 70 members. Several institutions besides Home State reportedly lost “one-fifth of their deposits” over four days.See Horn, 1985, p. 247. In the annals of deposit runs, these were quite fast and large, though their setting was unusual in post-Depression history insofar as these institutions did not benefit from the stabilizing presence of federal insurance programs like the Federal Deposit Insurance Corp. The thrifts involved were generally small and locally operating, but altogether had about 500,000 depositors.

Urgent Requests for Discount Window Loans

The Federal Reserve Bank of Cleveland made a loan to Home State after three days of reviewing collateral: Home State first inquired about a loan on Monday, March 4, the collateral review began on Wednesday, and the loan was extended at 4 p.m. on Friday. Despite the loan, Home State did not open for business on Saturday, March 9, and later that day the Ohio governor appointed a conservator for the institution.

Loans to other ODGF-insured institutions appear to have been executed in about seven days.See Horn, 1985, pp. 252-57. On the day of Home State’s conservatorship, Cleveland Fed staff began to examine data from other ODGF-insured thrifts. Two days later, on Monday, March 11, the Fed prepositioned staff throughout the state to deliver borrowing documents if requested. By the following Monday, March 18, the Fed appears to have finished its collateral review and executed borrowing arrangements for many ODGF-insured thrifts.

Despite the discount window loans, these thrifts generally remained closed the week of Monday, March 18, after the governor had put in place a banking holiday for ODGF-insured institutions the previous Friday, March 15. The banking holiday lasted a week, after which the thrifts reopened on a case-by-case basis. Most of the 70 thrifts formerly insured by the ODGF were fundamentally sound and able to reopen and qualify for federal deposit insurance; 26, however, were too weak to survive as independent institutions and merged into out-of-state banks and thrifts.See Paul R. Watro’s October 1988 article, “How Are the Ex-ODGF Thrifts Doing?” (PDF), in the Federal Reserve Bank of Cleveland’s Economic Commentary.

Executing Loans Quickly

When these Ohio thrifts developed urgent lending needs in 1985, many evidently did not have prior arrangements in place that would have allowed them to borrow from the Federal Reserve at a fast pace. Many reportedly had no prior interactions with the discount window. Indeed, thrifts in the United States had only recently gained access to the discount window, which until 1980 had been reserved only for commercial banks. As a result, the process of pledging collateral for these Ohio thrifts was time consuming and likely caused significant delays in loan execution.

As background, discount window borrowers must pledge collateral to protect the Federal Reserve from losses in the event of the borrower’s default. Some collateral, such as U.S. Treasury instruments, is relatively easy to pledge. For example, if the Federal Reserve is the custodian of Treasury instruments through the Fedwire Securities Service, it can execute bookkeeping entries to appropriately mark those securities as collateral for a discount window loan.

Pledging some other assets, such as residential real estate mortgages or commercial loans, can take longer. The Federal Reserve must review the collateral and arrange for the ability to sell the collateral if necessary. This process also once generally required physical transport of loan documents to a Federal Reserve office, and transportation delays could be significant if a bank was not located close to a Federal Reserve facility or if the collateral documents were voluminous.See the April 1979 Federal Reserve Bank of New York circular “Letter Regarding Liberalization of Requirements for the Submission of Collateral to Secure Discount Window Borrowings.” In 1978, the Fed began allowing borrowers to retain their own loan documents, an arrangement that came to be known as “borrower-in-custody” (BIC). Setting up a BIC arrangement requires that borrowers segregate the pledged loans in their internal systems, provide information to the Fed about each loan, and take other steps to ensure that the Fed can identify and take possession of the collateral if necessary.

BIC arrangements do not appear to have been in place for affected thrifts in Ohio in 1985. To speed loans, the Cleveland Fed stationed staff members across the state the weekend of Home State’s failure to deliver discount window borrowing documents quickly if requested. The Cleveland Fed also took the extraordinary step of establishing field warehouses, which are office spaces temporarily leased by a Federal Reserve Bank at the premises of depository institutions. With a field warehouse, a Federal Reserve Bank can take possession of pledged collateral by physically moving the paper into the warehouse, obviating the need for its transportation to a Federal Reserve Bank or branch. Altogether, 200 employees from all 12 regional Federal Reserve Banks and the Board of Governors operated the field warehouses in Ohio and reviewed collateral.See Horn, 1985, p. 249; the U.S. GAO report Financial Crisis Management: Four Financial Crises in the 1980s, May 1, 1997, p. 54; and the 2009 Federal Reserve Oral History Project interview (PDF) with Stephen C. Schemering, former deputy director, division of banking supervision and regulation at the Federal Reserve Board of Governors.

Thrift Contagion Spreads to Maryland

The Ohio crisis led to deposit runs in Maryland days later, out of fear of similar contagion through a private deposit insurance fund, the Maryland Savings-Share Insurance Corp. (MSSIC). The crisis in Maryland lasted two months, from March to May, as additional problems at Maryland institutions became evident.

At the very beginning of that crisis, a Richmond Fed official telephoned the head of the MSSIC to note that “very few MSSIC institutions” had set up borrowing with the Fed and to recommend that MSSIC associations “get borrowing resolutions in place.”See the state of Maryland’s Report of the Special Counsel on the Savings and Loan Crisis, 1986, pp. 437-38. By mid-April, when state officials thought the crisis was over, a postmortem took as a key lesson that “real liquidity is important and collateral at some level should be maintained pre-packaged” for delivery to the Richmond Fed if necessary.See the state of Maryland’s Appendix to the Report of the Special Counsel on the Savings and Loan Crisis, Volume 5 (PDF), 1986, pp. 3208-9 and 3171. Yet, in May, when the crisis came to a head, many Maryland associations evidently had still not set up borrowing with the Fed. More than 300 supervisory examiners came to the state for another urgent collateral review.See the May 14, 1985, article by John Frece and Ellen Uzelac in The Baltimore Sun, “Federal Examiners Coming In,” p. 1. In a replay of the events in Ohio, the governor of Maryland declared a state of emergency and limited withdrawals from MSSIC institutions. By the end of the summer, 79 of the 101 former MSSIC-insured thrifts were able to reopen, some with federal deposit insurance, but 18 remained under withdrawal restrictions and sought acquirers.See “Baltimore Bancorp,” Federal Reserve Bulletin, Board of Governors of the Federal Reserve System, November 1985, pp. 901-4.

Conclusion

The Bank of England was once described (however accurately) as taking a “frosted glass” approach to discount window lending in the 19th century, simply reviewing collateral slipped under a teller’s window. This image usefully highlights the centrality of collateral to the lending process, but it less usefully depicts a relatively passive central bank that simply waits at a window to receive collateral presented to it.

In practice, the Fed’s actions during the thrift crises in 1985 illustrate that a lender of last resort can take proactive steps to enhance the effectiveness of its facilities. These steps included reaching out to potential borrowers, anticipating borrowers’ needs to execute agreements, and taking steps to speed the review and pledging of collateral. The episode also highlights the time-consuming nature of reviewing collateral, especially collateral like real estate loans that are idiosyncratic and not already custodied at the Fed or correspondent banks. Ultimately, the thrifts’ lack of prepositioned collateral likely significantly delayed the execution of these loans, leading to temporary suspensions of banking activity in Ohio and Maryland.

Notes

1. See this February 2024 speech by Michael Barr, the Federal Reserve’s vice chair for supervision.
2. See the April 2023 report Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank (PDF), p. 4, by the Board of Governors of the Federal Reserve System and the April 2023 report FDIC’s Supervision of Signature Bank (PDF), p. 12, by the Federal Deposit Insurance Corp.
3. At this point in history, depending on state law, state-chartered thrifts had the option of not joining the Federal Savings and Loan Insurance Corp.
4. See Cleveland Fed President Karen Horn’s statement, p. 252, and Federal Home Loan Bank Board Chair Edwin Gray’s statement, p. 223, before the Subcommittee on Commerce, Consumer and Monetary Affairs of the Committee on Government Operations, U.S. House of Representatives, on April 3, 1985.
5. See Horn, 1985, p. 247.
6. See Horn, 1985, pp. 252-57.
7. See Paul R. Watro’s October 1988 article, “How Are the Ex-ODGF Thrifts Doing?” (PDF), in the Federal Reserve Bank of Cleveland’s Economic Commentary.
8. See the April 1979 Federal Reserve Bank of New York circular “Letter Regarding Liberalization of Requirements for the Submission of Collateral to Secure Discount Window Borrowings.”
9. See Horn, 1985, p. 249; the U.S. GAO report Financial Crisis Management: Four Financial Crises in the 1980s, May 1, 1997, p. 54; and the 2009 Federal Reserve Oral History Project interview (PDF) with Stephen C. Schemering, former deputy director, division of banking supervision and regulation at the Federal Reserve Board of Governors.
10. See the state of Maryland’s Report of the Special Counsel on the Savings and Loan Crisis, 1986, pp. 437-38.
11. See the state of Maryland’s Appendix to the Report of the Special Counsel on the Savings and Loan Crisis, Volume 5 (PDF), 1986, pp. 3208-9 and 3171.
12. See the May 14, 1985, article by John Frece and Ellen Uzelac in The Baltimore Sun, “Federal Examiners Coming In,” p. 1.
13. See “Baltimore Bancorp,” Federal Reserve Bulletin, Board of Governors of the Federal Reserve System, November 1985, pp. 901-4.