If banks were to keep, in cash, all the money deposited with them, business would come to a standstill and a crisis would ensue. If banks were to lend to those who apply for loans all the money on deposit with them, a general panic and collapse would follow a short period of overstimulation. Between those two extremes lies the middle course, the finding of which is the problem, and its practise the art of banking.Paul Warburg, The Discount Mechanism in Europe, prepared for the National Monetary Commission, 1910
On Feb. 23, 2023, BPI called for a holistic review of liquidity requirements. We pointed out that official assessments of a bank’s liquidity had undergone a sea change following the financial crisis, and not for the better. Before the global financial crisis, to be liquid, banks were encouraged to have reliable and well-diversified sources of funding, including being prepared to borrow from the discount window. After the crisis, attention shifted to requiring banks to hold large amounts of high-quality liquid assets, and the discount window was to be shunned. Two weeks after our call for a holistic review, Silicon Valley Bank (SVB) failed, with more than half of its portfolio invested in “high-quality liquid assets” (HQLA), but funded with concentrated and therefore unreliable uninsured deposits, after struggling unsuccessfully in the final hours to arrange a discount window loan.
In this note, we explain how that sea change from an emphasis on diversified and reliable contingency funding to the stockpiles of HQLA that did SVB no good was in fact a reversal of the policy that resulted in the creation of the Federal Reserve in 1913. Before the Fed was founded, bank liquidity was supposedly assured by reserve requirements, which strongly resembled current liquidity requirements. However, those requirements were seen as encouraging banks to hoard liquidity when under stress—actions that caused the liquidity strains to cascade through the banking system, precipitating five major banking crises during the National Banking Era that began in 1863. Following the Panic of 1907, the Federal Reserve was created to provide liquidity to the banking system. The Fed was designed to fix this problem by discounting commercial paper (that is, lending against bank loan collateral), assuring banks that they would have the currency they needed if faced with a run, and thereby reducing the need to stockpile cash as opposed to lending it out. That is, the Fed was designed “…to furnish an elastic currency, [and] to afford means of rediscounting commercial paper…” as the Federal Reserve Act stipulates.
After mapping those lessons into current circumstances, we conclude with some policy recommendations. In short, it’s time for the Fed to go back to the future.
Reserve requirements and financial system fragility
The first U.S. reserve requirements were introduced following the Panic of 1837 and were intended to ensure banks would have the resources needed to meet their obligations. The requirements were initially applied to bank notes, the currency then issued by banks as a source of funding and used by the public at the time. But as deposits became an increasingly important liability for banks in addition to the private currency that they issued, reserve requirements were applied to deposits as well. In some cases, the requirements distinguished between time and demand deposits, with a higher requirement applied to demand deposits, which were expected to be more likely to run. The types of assets that could satisfy the requirements varied by state and were generally more stringent for more important banks. In some cases, the reserve had to be entirely specie (gold and silver coins) held in the bank vault; in others, the deposits at other banks counted; and in a few, short-term loans were eligible. National banks were required to hold Treasury bonds as a 100 percent reserve against their bank notes.
The resemblance of these reserve requirements to current liquidity requirements, in particular the liquidity coverage ratio (LCR) requirement, is striking. The LCR requires banks to hold HQLA at least equal to 30 days of assumed net cash outflows under stress. The net cash outflows are calculated by applying fixed percentages to the various liability and off-balance-sheet items of banks, including higher percentages for flightier liabilities. The LCR requirement is more stringent for the largest banks than for medium-size ones. There are several types of assets that count as HQLA, but mostly, in practice, it consists of deposits at the Federal Reserve Banks (reserve balances), Treasury securities and agency-guaranteed mortgage-backed securities.
The designers of the Federal Reserve System were keenly aware that reserve requirements were a flawed method to ensure bank liquidity. The System was designed in the wake of the Panic of 1907. As described by O.M.W. Sprague in 1908, as banks became more concerned about the risk of runs, they pulled their reserves deposited with other banks and hoarded cash. As soon as a run began, banks suspended payments, even while in some cases they still had reserves to meet deposit withdrawals. Some larger banks started to discriminate in making payments, holding off cash shipments to smaller and more distant correspondents.
Members of Congress debating the Federal Reserve Act were strongly influenced by these events. For example, Rep. Edward Saunders (D-VA) stated:
The Panic of 1907 is often cited as a money panic. Business was at high tide, and crops were abundant. Out of that very abundance proceeded trouble. Called upon to furnish the needed currency, the banks approached the danger line fixed by the reserve laws in their efforts to meet the demands of their customers. In proportion to the reluctance of the banks to trench upon their reserves, and furnish additional money, the clamor for more money became increasingly violent. Suspicion and distrust stalked abroad. The banks took fright, and organizing for mutual protection, refused to provide the money needed, and in many instances, even to pay the balances to the credit of other banks. Business halted at full tide, freights ceased to move, industrial operations were curtailed. Men walked the streets vainly looking for work, and distress like a pall settled over our fair land.
Arguing that the proposed Federal Reserve System would make the financial system safer, Rep. Samuel Beakes (D-MI) made these observations about the pre-Fed system:
No bank can make any money and keep in its vaults money enough to pay all its depositors if they all want their money within a short time. So as times get tight the banks have been in the habit of loaning less and less money and hoarding up more of it to provide for emergencies, thus greatly increasing the very stringency which has caused them alarm.
Charles Hamlin, the first Chairman of the Federal Reserve Board, when explaining how the new System would eliminate financial panics, described the situation before its creation:
Each bank retreats into its own citadel at the sound of danger and at a time when it should be drawing upon its reserves to help the business man of the community, it stays aloof, piling up reserves like Pelion upon Ossa, and the business men have to care for themselves as best they can. Witness the condition of some of our banks during the financial panic of 1907, with reserves of 60 and 70 per cent, although the legal requirement was 15 per cent.
Several observers noted that part of the problem was the rigid determination of reserve requirements, a criticism that extended to the requirements used by the new Federal Reserve as well. Dennis Robertson, an English economist who worked closely with John Maynard Keynes, noted in 1924 that in continental Europe and England, determining an appropriate reserve was left to the banks. Robertson pointed out that if a bank chose to hold exactly the amount required but then used the reserves to meet an outflow, the application of reserve funds to the outflow would logically reduce reserves below the requirement. This situation would leave a bank with a choice between “infringing the law, or declaring itself insolvent, while its reserves are still far from exhausted.” Referencing the iron rations that WWI soldiers carried to feed themselves in an emergency, Robertson stated:
If a proportion fixed by custom is arbitrary and misleading, a proportion fixed by law seems at first sight to be positively mischievous. An iron ration which you must not touch even in the throes of starvation is something of a mockery.
In his description of the 1907 panic, Sprague stated, “Without exaggeration, this arithmetical reserve ratio can only be adequately characterized as a sort of fetish to which every maxim of sound banking policy is blindly sacrificed” (p. 366).
Again, the resemblance to the LCR is striking. Just as a critical problem of reserve requirements is that no bank was willing to use the reserves to meet outflows, a critical problem with the LCR is that no bank is willing to use its HQLA if doing so puts it out of compliance. For example, the Bank of England has noted that during a liquidity exercise it conducted in 2019, “Banks’ submissions suggested that, on the whole, they were unwilling to allow their LCRs to fall below 100%, even in extremely severe stress, if they could prevent them from doing so”. Similarly, a BPI survey of bank treasurers found that none of the treasurers would be willing to use HQLA to meet a funding need if doing so put the bank below a regulatory standard, even when the U.S. agencies encourage banks to do. Indeed, the two are intertwined. Before the Fed set reserve requirements to zero in April 2020, required reserves did not count as HQLA, because banks were not allowed to use them to meet outflows.
At the time that the Federal Reserve System was being designed, another animating concern was that large stockpiles of reserves implied correspondingly less lending, which reduced economic activity. In the Congressional debate of the Federal Reserve Act, Rep. Beakes described the merits of the proposed System:
This system has also made it perfectly safe to cut down the amount of reserves required to be kept. In the country banks, for instance, 15 percent of deposits are now required to be kept as reserves and cannot thus be used. It is perfectly safe to cut this down to 12 per cent as the Glass bill does, because if more money is needed it is instantly obtainable. This cut of 3 percent will release many millions of dollars for use in commerce and production. (p. 4906)
Similarly, Sen. Claude Swanson (D-VA) observed:
These Federal reserve banks will become to all the banks of this country like the Bank of England is to the English banks, the Bank of France is to the French banks, and the Reichsbank of Germany is to the German banks—places of refuge and hope in time of financial trouble. The banks of this country removed from this apprehension can accommodate their customers and the legitimate demands of business without continual trepidation. (p. 430)
Again, parallels are clear. As a result of the LCR, internal liquidity stress test, net stable funding ratio, and non-public resolution liquidity requirements, commercial banks in the United States now hold more than 32 percent of their assets in cash or cash equivalents and Treasury or government agency obligations, funding the government rather making loans to the private economy.
Lastly, observers recognized that reserve requirements contributed to a movement of credit intermediation out of the banking system and into the less regulated shadow banking system, adding to financial stability risks. The most intense part of the Panic of 1907 was precipitated by a run on trust companies. “These institutions took deposits and were similar to banks, but the state laws allowed them to operate with smaller reserve requirements; indeed, these institutions established themselves as trust companies partly to avoid capital and reserve requirements.” Frydman and colleagues noted that because trust companies did not hold substantial deposits from out-of-town banks, the trusts argued that they could hold lower cash balances and did not need to be members of the New York Clearing House, the private organization then offering lender-of-last-resort services to member banks. Trust companies had grown rapidly over the preceding decade. Although their lending was half that of the city’s national banks in 1890, it was roughly equal to that of national banks in 1906.
The 1907 run was sparked by a failed attempt on Oct. 14-15 by Otto Heinze and Charles W. Morse to execute a short squeeze on the shares of a copper mining company.  Heinze and Morse attempted to drive up the share price by purchasing the shares on margin. The objective had been to force short sellers to exit their shorts, driving the price up farther. However, the effort failed, and Heinze and Morris defaulted on their margin loans, leading to the failure of the brokerage that executed the transactions. Initially, banks tainted by the scandal were run on; however, funding from the New York Clearing House, combined with a clean sweep of their management, stabilized their situation. But the scandal then extended to Knickerbocker Trust Company, one of the largest in the city, and depositors began to withdraw their funds fast. Knickerbocker requested a loan from the Clearing House but was turned down, and it was forced to close its doors on Oct. 22. The panic then spread to other trust companies.
Writing in 1908, Sprague gave this account:
Returning to the narrative of events in New York, it is to be noted that there had been nothing in the nature of a crisis during the week the clearing house was putting its affairs in order. Crisis conditions developed during the following week, and were occasioned by the difficulties of certain trust companies, a group of financial institutions outside the clearing house. Trust companies were originally formed, as the name implies, to act as trustees, and, until about twenty years ago [about 1888], had confined themselves closely to business of that nature. For the effective performance of their functions, they were necessarily given wide powers, and gradually it came to be perceived that they could engage in banking, unfettered by the restrictions imposed upon both national and State banks. Thereafter the number of companies increased rapidly in most American cities, but especially in New York, where, in recent years, their deposits have been not much less than those of the clearing-house banks. (pp. 359–360)
There is again an echo of these events in the failures of SVB and Signature Bank this spring. Neither bank was prepared to borrow from the discount window; like the trust companies that did not have access to liquidity support from the Clearing House, the institutions were unable to meet a run on their deposits and had to suspend payments. Contagion this spring was stemmed in part by the Federal Reserve expanding the liquidity support it provided the rest of the banking system by opening the Bank Term Funding Program, which provided longer-term discount window loans for amounts that exceeded the value of the collateral.
The discount window as the solution
The Federal Reserve was created to accomplish two objectives. Writing in 1916, a few years after the creation of the System, Paul Warburg, the second vice chairman of the Federal Reserve and one of the original members of the Federal Reserve Board of Governors, enumerated the objectives:
The Federal Reserve Act brought about a most radical change. It created a system of twelve central banks which, co-operating with one another, were from then on to exercise two important functions in relation to their member banks; first, to provide a sufficient gold cover for the country’s gold obligations; and second, to provide the machinery for turning, whenever desired, the member banks’ commercial assets into available credit balances, or cash. 
Warburg stated that “[t]he vicious shortcomings of [the prior reserve requirement system] are well known to everybody here, and need not be elaborated.” The vicious shortcomings may have been well known to Warburg’s audience of bankers in 1916, but they are no doubt worth recapping. As described by Carlson, national banks outside the large cities, known as “country banks,” were required to hold reserves of 15 percent of deposits, three-fifths of which could be held as deposits at banks in reserve cities (the larger cities). Banks in reserve cities were required to hold reserves equal to 25 percent of deposits, half of which could be deposits at banks in Central Reserve cities (New York, Chicago and St. Louis). Banks in Central Reserve cities also needed to maintain reserves of 25 percent of deposits, all of which were gold or legal tender. State banks, which made up about half of commercial banks, were subject to similar requirements, although the amount of reserves and the composition of reserves required to meet the requirements varied across states.
Hamlin, describing the merits of the new Federal Reserve System in 1914, called this prior arrangement “an interdependence of danger rather than of strength.” For example, in 1907, as banks become more concerned about the risk of runs, they all sought to increase the proportion of their reserves that was cash on hand and reduce their deposits at their correspondent banks. The pyramiding of deposits meant that the strains were focused on the Central Reserve city banks, which in some cases suspended cash shipments, further accelerating the hoarding of cash. The shortage of cash became so severe that businesses closed, and economic activity contracted sharply. 
Warburg, who had a gift for analogies, described the system as similar to a village faced with a risk of fire from lightning strikes that gave each household one bucket of water, insufficient to prevent a fire. The Fed, in contrast, was the fire department that communally held the community’s water so it could be directed where needed.
Although a common system for holding reserves was a critical objective for creating the Federal Reserve, it is the second goal, fostering a place where banks could convert their loans into cash, that is relevant to the current policy debate. Specifically, commercial banks were able to take short-term business loans to their Reserve Bank, and the Reserve Bank would give the banks cash in an amount that was a discount of the face amount of the loan. When the loan was repaid, the Reserve Bank received the principal, with the discount paying the interest on the loan. Expanding on his fire department analogy, Warburg stated, “to continue the metaphor, the central bank and discount system provides not only for a centralization of reserves and for concerted action in accumulating and in using the same, but it also furnished the means of reaching and of creating a new supply of water.”
Fed loans to commercial banks now take the form of collateralized advances. However, they are called “discount window” loans, and the interest rate the “discount” rate, precisely because they are the modern form of discounting commercial paper. Indeed, most of the collateral that banks pledge to the Federal Reserve remains loans rather than securities.
By standing ready to discount bank business loans, the Fed enabled banks to hold a smaller quantity of their balance sheets in cash, reduced the incentive to hoard cash in a crisis, and even encouraged banks to use their reserves when under stress. Significantly, the Fed was not seen as bailing out banks by doing so, or even as offering lender-of-last-resort loans, but instead was seen as transforming commercial paper from an illiquid asset to a liquid one. Commercial banks became genuinely more liquid because of the option to discount their short-term business loans at the Fed and were consequently taking on less liquidity risk when extending loans to businesses. Describing the use of discounts in Europe, Warburg in 1910 explained:
Through the acceptance or indorsement of the merchant’s note by the bank or banker the promissory note—from being a dead instrument and a nonliquid asset—becomes a liquid asset, part and parcel of the system of tokens of exchange which serve as a substitute for money or as auxiliary currency. (p. 131)
Likewise, Charles Hamlin, the first to lead the Federal Reserve Board, in 1914 described what the new System accomplished:
The mobilization of reserves and the turning of commercial paper into a liquid investment, will enable every bank to draw down its reserves with confidence that it can replace them at will if it has proper commercial paper at its disposal. (p. 6)
In 1910, Warburg observed that to accomplish these potential benefits, it must be absolutely certain that the bank could tap central bank funding if it has the necessary collateral. “There must never arise any doubt that a legitimate demand for cash will be met promptly and that legitimate quick assets [that is, short-term business loans] can be turned into cash credits.” Six years later, after the creation of the Fed, Warburg noted that the second line of defense for a bank after currency or deposits at the central bank are “those assets which, with certainty and promptness, be converted into credit balances with the central bank.” It is worth noting that the Fed has so completely failed to offer this certainty currently that the OCC recently revised its manual for supervisors to state: “The discount window is available to relieve liquidity strains for individual banks as well as the banking system, but the Federal Reserve Banks are not required to lend through the discount window and may turn banks away.”
Today, our currency and deposits are no longer tied to the gold standard, and reserve requirements are zero. The Fed can and does expand the quantity of reserves as needed to support the economy. And banks are able to raise funds in financial markets quickly and easily without operating through a central bank. But the overlap between the known (although perhaps largely forgotten) shortcomings of relying on reserve balances to ensure a bank’s liquidity and the problems with relying on HQLA to ensure a bank’s liquidity is sufficiently striking to suggest that it might be useful to examine the solution the Fed’s creators adopted to resolve modern liquidity problems. For example, banks are unwilling to use their HQLA, just as they were unwilling to use their reserve balances. Indeed, in March 2020, some banks reported selling assets at fire sale prices, declining to roll short-term funding, refusing to buyback commercial paper, and cutting some lending rather than risk falling below a regulatory standard—exactly the type of contagious activity liquidity regulations are intended to eliminate. Similarly, as we discussed, banks in 1907 were unwilling to use their reserves to provide liquidity to other banks, or even suspended deposit withdrawals, when they were at risk of breaching reserve requirements. Lastly, in the pre-Fed situation as now, the reserves and HQLA shift bank balance sheets away from lending to businesses and households, reducing economic activity.
In part, the solution in 1913 with the creation of the Fed and the design of the LCR are similar and beneficial. The Fed was created to replace the pyramid system of reserves with one where all reserves were held at the Federal Reserve Banks. The objective and result were to reduce interconnectedness and channels of contagion. Similarly, the LCR does not recognize deposits at other banks as HQLA; nor are banks allowed to anticipate drawing on lines of credit from other banks, design characteristics intended to reduce interconnectedness between banks.
But in part, the solutions are diametrically opposed. There is a catch-22 inherent in liquidity requirements. They are intended to instill confidence that banks will be able to meet their obligations by assuring that they have stockpiles of liquid assets. They can only accomplish that objective if banks are willing to use those stockpiles to meet those obligations. But if the banks use the HQLA, it is not there to instill confidence. You can’t eat your cake and have it too. If banks instead respond to liquidity strains by pulling back from lending and selling assets at fire sale prices, the strains can magnify into a crisis—exactly the outcome the liquidity regulations were intended to prevent.
Recognizing the impossibility of accomplishing both objectives with reserve requirements alone, the creators of the Federal Reserve System met the two objectives using different tools. To inspire confidence efficiently and safely in bank notes and deposits, the designers arranged for reserves to be maintained at Reserve Banks. To make banks willing to use their reserves when needed and to refrain from hoarding cash when under strain, they endowed the Reserve Banks with the authority to discount short-term bank loans to businesses. This transformed the business loans into liquid assets, giving banks much greater resources with which to face a run.
By contrast, not only is the LCR intended to both inspire confidence and create usable reserves, but, as discussed in “Is it time for a holistic review of liquidity requirements?”, the requirement was also intended to make it unnecessary for banks to borrow from the central bank. That perspective has contributed to the current hostile attitude toward using the discount window, which has degraded its usefulness as a tool to promote financial stability.
Instead, liquidity requirements should be augmented to recognize that banks can borrow from the discount window. That capacity, established by prepositioned collateral, should be seen as a viable and important contingent source of funding and encouraged by the banking agencies in the regulatory and supervisory liquidity standards. Doing so would not only make the assessments more accurate, but they would also encourage banks to be prepared to borrow from the window. Aware that they could replenish their liquidity position by pledging more collateral, banks should also be less included to hoard, and more willing to use, their HQLA.
The recent failures of SVB and Signature Bank have demonstrated the wisdom of this approach. As we describe in “Improving the government’s lender of last resort function: Lessons from SVB and Signature Bank,” the failures were made significantly more disorderly and costly because neither bank was prepared to borrow from the discount window. Moreover, even though the majority of SVB’s assets were HQLA, it was unable to quickly turn those assets into the cash it needed. Had the banks been given the appropriate incentive to be prepared to borrow from the Fed, the entire episode of banking turmoil this spring might have been avoided.
One way to accomplish these objectives would be for the Fed to offer banks committed lines of credit for a fee. As discussed in “CLF notes – what is a committed liquidity facility?”, CLFs are included in the international standard for the LCR, and the U.S. implementing regulation states that the U.S. banking agencies would consider using them. Because they would commit Reserve Banks to lend to any bank with a CLF, they would provide the certainty that Warburg stated was necessary and the lack of which the OCC lamented. Because they would be collateralized by loans to businesses and households, banks would be able to continue to provide credit to the economy, supporting growth and employment. Because they would be sold to banks for a fee, banks would be self-insuring against their liquidity risks. Indeed, just as with discounts, the CLFs would make the banks genuinely more liquid by liquifying their illiquid loans pledged as collateral, so bank liquidity risk would decline.
At the other end of the spectrum, at a minimum, the Fed could require banks to pledge collateral and be ready to borrow from the discount window if necessary. For example, the National Credit Union Association has long required credit unions to either be prepared to borrow from the discount window or from the NCUA’s similar Central Liquidity Facility.
In the early 20th century, monetary and banking policy makers understood that the liquidity of commercial banks could not be guaranteed by simply requiring them to hold liquid assets in fixed proportions to their liabilities. Indeed, Carlson notes: “Subsequent to the establishment of the Federal Reserve, the purpose of reserve requirements shifted from being used to maintain individual bank liquidity to providing a tool for the central bank to control the cost of liquidity and credit”. Reserve requirements needed to be combined with the ability and willingness of the Reserve Banks to discount commercial paper to ensure that banks were liquid and the system resilient.
Following the Global Financial Crisis, the Fed moved full circle, evidently having forgotten the lessons of the pre-Fed era. It essentially recreated the system of rigid reserve requirements by requiring banks to hold HQLA in fixed proportion to liabilities while actively discouraging use of the discount window. Subsequently, the Fed seemed frustrated that banks were unwilling to use their HQLA, even though such reluctance had been a well-known and widely discussed consequence of pre-Fed reserve requirements. It also seemed to have been caught flat-footed when an institution with abundant HQLA but no ability to use the discount window had to close its doors in the face of a run by depositors, even though exactly such events were partly why the Fed was created. As Congressman Saunders noted in 1913 during the Congressional debate over the Federal Reserve Act:
A run is the most dreadful thing that can happen to a bank. The community loses its head. The depositors in excited throngs jostle each other in their frantic efforts to be the first to remove their deposits from the institution under suspicion. If continued, a run will drive any bank, however inherently sound and well conducted, to close its doors. The new system will be a prophylactic. It will steady the public mind by giving them confidence in the banks. In addition, it will furnish the member banks with sources of strength in time of stress. Any bank short on cash, but supplied with good collateral, can secure all the money that it needs, either to meet a run, or for crop moving, by application to a reserve bank. (p. 4880)
Similarly, when speaking in 1916 of the importance of banks having a supply of commercial paper eligible for discount, Warburg observed: “If member banks are to rely for their protection primarily upon their ability to credit balances with their Federal Reserve Banks, they must be certain that they have in their possession an easy means of approach, a reliable key that will open for them the door leading to the Federal Reserve Banks’ vaults.”
Unquestionably, another consequence of the failures of SVB and Signature Bank is a reassessment upward of the speed with which certain uninsured depositors will run from a bank that falls under suspicion. The regulatory response may well be to recalibrate liquidity requirements to reflect that revised view, akin to raising reserve requirements. Absent other changes, the consequence will be to require banks to hold even more HQLA. This will cut their lending to businesses and households and slow the economy, just as increasing reserve requirements slows it. Alternatively, or in addition, the government could raise deposit insurance sharply. This would require a corresponding tightening of bank regulations to address the attendant increase in moral hazard. Both actions will also shift even more intermediation into the shadow banking system.
Instead, the Fed could plot a middle course. It could return to its roots by allowing banks to address any needed increase in liquidity with improved ability to convert their loans to businesses and households into reliable contingent sources of funding by offering each bank a committed line of credit, a CLF, for a fee. Doing so would make banks more liquid, more willing to use their HQLA, encourage more banks to be ready to use the discount window when under stress, and promote appropriate incentives for managing their liquidity risk. As a result, the financial system would be made more resilient without sacrificing economic growth or employment.
 Bill Nelson, Is It Time For a Holistic Review of Liquidity Requirements?, BPI (Feb. 23, 2023), https://bpi.com/is-it-time-for-a-holistic-review-of-liquidity-requirements/
 The term “commercial paper” referred to short-term bank loans to businesses, not the modern usage of short-term borrowing by businesses in the marketplace. In this note, we will use the term “commercial paper” in its prior sense, a short-term bank loan to a business.
 The National Banking Act of 1864 required banks in the larger cities to hold more reserves because those banks held more interbank deposits, seen as especially likely to be withdrawn under stress. Mark Carlson, Lessons from the Historical Use of Reserve Requirements in the United States to Promote Bank Liquidity, 11 Int’l J. of Cent. Banking 191-224 (2015).
 National Banking Acts of 1863 and 1864, Federal Reserve History (July 31, 2022) https://www.federalreservehistory.org/essays/national-banking-acts.
 Gorton, Gary, Toomas Laarits, and Tyler Muir. “Mobile collateral versus immobile collateral.” Journal of Money, Credit and Banking 54.6 (2022): 1673-1703.
 Oliver MW Sprague, The American crisis of 1907, 18 Econ. J. 353-372 (1908).
 50 Congressional Record 4880 (House, 1913).
 Id. at 4906.
 An identical problem exists with the LCR because projected cash outflows are calculated as fixed percentages of each liability item. As a result, a bank that just complies with the LCR and uses its HQLA to meet an outflow falls out of compliance. For a change to the requirement that can fix this problem, see Bill Nelson, A Modest Change to the LCR That Could Substantially Improve Financial Stability, Bank Policy Institute(Mar. 21, 2019), https://bpi.com/a-modest-change-to-the-lcr-that-could-substantially-improve-financial-stability.
 Dennis Robertson, Money, 57 (1924).
 DP1/22 – The prudential liquidity framework: Supporting liquid asset usability, Bank of England (Mar. 31, 2022), https://www.bankofengland.co.uk/prudential-regulation/publication/2022/march/prudential-liquidity-framework-supporting-liquid-asset-usability.
 See Statement on the Use of Capital and Liquidity Buffers, FRB, FDIC, OCC(Mar. 17, 2020), https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200317a1.pdf; Questions and Answers (Q&As) on Statement Regarding the Use of Capital and Liquidity Buffers, FRB (Mar. 19, 2020), https://www.federalreserve.gov/supervisionreg/srletters/SR2005a1.pdf.
 Bill Nelson and Jeremy Newell, Realizing the Liquidity Benefit of Required Deposits at the Fed, Bank Policy Institute(Dec. 13, 2017), https://bpi.com/realizing-the-liquidity-benefit-of-required-deposits-at-the-fed.
 Statistical Release H.8, Assets and Liabilities of Commercial Banks in the United States, Table 2, data for July 2023, FRB (August 11, 2023), https://www.federalreserve.gov/releases/h8/current/default.htm.
 Carlson, supra note 4, at 211.
 Carola Frydman et al., Economic effects of runs on early “shadow banks”: Trust companies and the impact of the panic of 1907, 123 J. of Pol. Econ., 902-940 (2015). The Bank Policy Institute is the product of a merger between the Financial Services Roundtable and the Clearing House Association. The Clearing House Association was an affiliate of the Clearing House, the slightly renamed New York Clearing House.
 Robert F. Bruner and Sean D. Carr, The Panic of 1907: Heralding a New Era of Finance, Capitalism, and Democracy (2023).
 Greg Baer et al., Improving the Government’s Lender of Last Resort Function: Lessons from SVB and Signature Bank, Bank Policy Institute (Apr. 24, 2023), https://bpi.com/improving-the-governments-lender-of-last-resort-function-lessons-from-svb-and-signature-bank.
 Bank Term Funding Program, FRB (Aug. 18, 2023), https://www.federalreserve.gov/financial-stability/bank-term-funding-program.htm.
 Hon. Paul Warburg, The Reserve Problem and the Future of the Federal Reserve System, Address before the Convention of the American Bankers Association, Kansas City, MO, 11 (Sep. 29, 1916).
 Carlson, supra note 4, at 191-224.
 For a discussion of how requirements varied across states, see 525Eugene Nelson White, The regulation and reform of the American banking system, 1900-1929 (2014); Haelim Anderson et al., Bank networks and systemic risk: Evidence from the national banking acts, 109 Am. Econ. Rev. 3125-3161 (2019).
 Hon. Charles S. Hamlin, The Federal Reserve System as Established and in Operation, An address delivered before the New York Chamber of Commerce, 2 (Dec. 3, 1914).
 Sprague, supra note, at 7.
 Paul M. Warburg, The Discount System in Europe, 151-152 (1910); Paul M. Warburg, A United Reserve Bank of the United States, 82-83 (1910).
 Warburg, The Discount System in Europe, at 152.
 See Quarterly Report on Federal Reserve Balance Sheet Developments, FRB,13 Table 5 (Mar. 2019), https://www.federalreserve.gov/monetarypolicy/files/quarterly_balance_sheet_developments_report_201903.pdf. This was the most recent report in which the Fed provided information on discount window collateral. Given the widespread agreement that the bank failures in spring 2023 demonstrate the criticality of banks being prepared to borrow from the discount window, perhaps the Fed will provide more current information soon.
 Warburg, A United Reserve Bank of the United States, supra note 26, at 82.
 Warburg, supra note 21, at 9.
 Shortly after releasing the new version, the words “and may turn banks away” were removed. See 1.2 Liquidity, OCC (May 2023), https://www.occ.gov/publications-and-resources/publications/comptrollers-handbook/files/liquidity/index-liquidity.html.
 Bank of England, supra note 12.
 See Bill Nelson and Pat Parkinson, A Major Limit on the Fed’s Crisis Toolkit: Shame, Bank Policy Institute (Jan. 25, 2022), https://bpi.com/a-major-limit-on-the-feds-crisis-toolkit-shame/.
 As discussed in the note, using of CLFs to bolster banks’ liquidity resembles but is less extreme than Mervyn King’s and Paul Tucker’s proposals to require each bank to pledge sufficient collateral to establish borrowing capacity at the central bank equal to all the bank’s liabilities.
 Carlson, supra note 4, at 213.
 Not everyone at the Fed was surprised. When the LCR was proposed in 2010, Board research staff expressed concern about the regulation in a briefing document the staff prepared for the Federal Open Market Committee:
Perhaps a more substantial concern about the LCR is its effect on financial stability . . . [O]nce banking institutions are subject to the LCR, in financial crises they would presumably demand an increased buffer of liquid assets above the level required to satisfy the regulatory requirement. Without an increase in liquidity provided by the central bank, the result would likely be significant pressures in funding markets despite the LCR.
Report to the FOMC on Economic Conditions and Monetary Policy, FRB (Dec. 8, 2010), 21 https://www.federalreserve.gov/monetarypolicy/files/FOMC20101214tealbooka20101208.pdf
 Warburg, supra note 21, at 30.