Washington, D.C. — As the Fed aims to improve its discount window, a key source of contingency funding, it should harmonize and modernize its operations, increase its transparency and encourage bank readiness to use the window in more ordinary circumstances, BPI said in a comment letter today. The Fed’s effort to seek public input on this issue is an encouraging step forward in addressing the window’s challenges.
What BPI is saying: “We welcome the Fed’s efforts to make the discount window a more effective tool to support financial stability. The banking turmoil of 2023 made it clear that ensuring the window is ready and efficient to use is an urgent priority. It’s critical that new improvements cement the window as an ordinary liquidity tool rather than a disparaged and disused emergency lever. Regulators should also consider changes to the window not in isolation but in the context of liquidity requirements.”
— Brett Waxman, BPI SVP and senior associate general counsel
Background: The Fed is seeking feedback on the discount window’s “operational effectiveness” as it considers potential improvements. The window has long suffered from clunky infrastructure and is known to have significant stigma attached to its use; as a result, banks may have been unwilling or unable to use it in a liquidity crisis, as in the bank failures of 2023.
4 key focus areas: To improve the discount window, the Fed should focus on four main objectives:
- Harmonizing operational practices across Reserve Banks.
- Improving transparency about which collateral is eligible for being used in discount window borrowing and how it is valued.
- Modernizing operational processes.
- Encouraging bank readiness to borrow.
Big picture: Potential discount window reforms are only one element of a broader rethinking of the liquidity framework that should be considered by the banking agencies, along with efforts to reduce associated discount window stigma. The agencies should take into account discount window availability in liquidity requirements, such as the liquidity coverage ratio internal liquidity stress tests, and examiners should take it into account when evaluating banks’ liquidity and funding.
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About Bank Policy Institute.
The Bank Policy Institute is a nonpartisan public policy, research and advocacy group that represents universal banks, regional banks and the major foreign banks doing business in the United States. The Institute produces academic research and analysis on regulatory and monetary policy topics, analyzes and comments on proposed regulations, and represents the financial services industry with respect to cybersecurity, fraud, and other information security issues.
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- Tara Payne, Bank Policy Institute, tara.payne@bpi.com
