The Federal Reserve does not accept auction-rate securities issued by closed-end funds as collateral against loans from its discount window, eliminating a potential source of cash for banks preparing to buy back billions of dollars of these securities.

With little spare capacity on their balance sheets and with funding costs in the capital markets remaining stubbornly high, the Fed’s funding window could be important to plans to buy back the $50bn of auction-rate securities (ARS) required as part of recent deals between banks and regulators to compensate mainly retail investors.