(Bloomberg) — The Federal Reserve’s discount window has been so synonymous with trouble that the central bank has taken steps to cut back the stigma of banks tapping it. But just before the newest banking crisis, the window’s biggest borrower was a small Las Vegas bank, fueling its best 12 months ever.
Most Read from Bloomberg
Beal Bank USA — a part of the financial empire of Andy Beal, a billionaire supporter of President Donald Trump — tapped the Fed for billions of dollars in emergency financing in late 2022, just before the regional-banking crisis that took out lenders including Silicon Valley Bank and First Republic Bank.
Newly released Fed data show that Las Vegas-based Beal Bank USA had borrowed as much as $4.7 billion from the discount window, because the central bank’s emergency lending facility is thought, as of Dec. 7, 2022, the newest date for which figures can be found. Tapping the discount window is initially anonymous, however the Fed publishes the names of borrowers following a two-year lag.
The information provide fresh insight into the unfolding of the 2023 regional-banking crisis, which culminated within the collapse of banks including SVB and Signature Bank, and spurred Silvergate Capital Corp. to shut its doors. Silvergate, which provided services for the crypto market, began tapping the discount window in November 2022, the information show, with loans topping out at $4.5 billion as of Nov. 18 of that 12 months.
4 months later the La Jolla, California-based bank announced it was winding down operations.
Closely held Beal Bank USA was on a really different trajectory. It ramped up borrowing from the Fed within the second half of 2022, a 12 months by which it launched into a big wager tied to inflation and rising rates of interest. The bank, which began the 12 months with just over $5 billion in assets, cut its loans by roughly 20% over the course of 2022 while it piled $18 billion into Treasury securities.
The lender’s net income greater than doubled to $1.2 billion in 2022, generating a return on equity — a key measure of a bank’s profitability — north of 40%. That’s triple what any of the ten largest US banks — giants equivalent to JPMorgan Chase & Co. — produced that 12 months.
It’s unclear exactly how Beal Bank USA used the cash from the Fed. Nonetheless, the timing of the maneuver suggests the corporate might need borrowed from the federal government so as to lend to the federal government. Yields on short-term and long-term Treasuries surged past 4% within the second half of 2022. Meanwhile, Beal Bank USA secured discount window loans at rates of two.5% to three.25% that September and October.
A spokesperson for Beal Bank USA declined to comment. Representatives for the Federal Reserve Bank of Dallas and the San Francisco Fed — the district by which Beal Bank USA operates — declined to comment.
The discount window is just one among a constellation of borrowing facilities available to lenders within the US. They vary from the Fed’s overnight reverse repo program to the Federal Home Loan Banks, or FHLBs, which supply funds to a variety of monetary institutions.
Beal Bank USA and Beal Financial Corp., Beal’s Texas-based bank holding company, also tapped the FHLBs for a collective $4.4 billion in 2022, Bloomberg News reported in 2023. That facility is alleged to ease banks’ mortgage lending, however the Federal Home Loan Bank of Dallas said in a 2022 filing that “among the Bank’s larger members also used advances to fund investment activities.”
Beal himself, an avid poker player with a passion for sophisticated mathematical theory, is thought for making daring bets on investments, famously scooping up energy bonds throughout the California power crisis in 2001 and buying debt backed by business aircraft following the Sept. 11 terrorist attacks.
Lately, Beal has turn into an avid supporter of Trump, donating thousands and thousands to support his 2016 and 2024 campaigns.
The information on Beal Bank USA’s Fed borrowing could add to scrutiny of banks’ use of emergency lending facilities. The discount window allows banks to borrow against high-quality collateral at above-market rates. The dearer rate means it’s typically used as a final resort — and plenty of banks are still reluctant to tap the ability even after efforts by regulators to remove the stigma related to its use.
Borrowing on the discount window began creeping up in late 2022, nonetheless, raising eyebrows at a time when the quantity of liquidity within the economic system was considered relatively high and banks overall showed few signs of funding strains.
Banking experts suggest that the difference between benchmark borrowing rates and the discount window rate had shrunk in late 2022, meaning that the financing was more attractive to smaller institutions which generally pay a better premium than larger banks for funding.
“If you take a look at the gamut of smaller institutions, there’s lots of them where that’s not such an unattractive rate,” Bill Nelson, chief economist on the Bank Policy Institute and a former Fed worker who helped design and manage the discount window for a decade, told the Odd Lots podcast in early 2023. “Possibly they lost a municipal deposit and want funding for a bit of while.”
The jump in discount-window borrowing in late 2022 helped spark a wave of speculation in regards to the health of banks, culminating in a run on deposits just a few months later.
Since then, some regulators have been urging for a requirement that banks frequently tap the discount window, each to practice using the ability and to further reduce stigma around its use during times of crisis.
“The discount window keeps the banks alive,” said Anat Admati, a finance and economics professor on the Stanford Graduate School of Business. “It will not be meant to be where they fund every thing.”