Federal Reserve urges banks to routinely utilize discount window for stability
In response to recent banking sector turmoil, Federal Reserve Vice Chair Michael Barr has emphasized the importance of incorporating the Federal Reserve’s discount window into banks’ liquidity risk management strategies. Speaking at a European Central Bank event today, Barr advocated for the frequent use of this central bank backstop tool, which he believes should be destigmatized among regulators and market observers.
During his address, Barr pointed out the shortcomings in emergency funding mechanisms that were brought to light by rapid bank failures earlier this year, including those of Silicon Valley Bank. He acknowledged that the current liquidity regulations, which are designed to cover 30-day cash outflow scenarios, may not be sufficient to withstand sudden bank runs. This has led to a reevaluation of supervisory practices around liquidity risk, with a focus on the liquidity coverage ratio and the net stable funding ratio.
Barr also addressed the operational challenges banks face in quickly converting high-quality liquid asset buffers into cash. He criticized the response times of private funding sources, such as Federal Home Loan Banks and private repo lenders, which have been slower compared to federal facilities. The Fed’s analysis post-crisis revealed that some banks have improved their positioning for accessing the discount window by better aligning their assets with potential liabilities.
Although Barr conceded that these measures would not have prevented the collapse of Silicon Valley Bank or Signature Bank (OTC:SBNY), he stressed that they are crucial for managing less severe liquidity crises when paired with proper risk management strategies.
