Federal Reserve Vice Chair for Supervision Michael Barr said changes to liquidity requirements could be necessary following last spring’s string of high-profile bank failures.
Speaking Dec. 1 at a central banking conference in Germany, Barr said banks must have sufficient self-insurance and discount window preparedness for any potential market stressors. He sees the deposit window as a crucial tool for financial stability, especially as the proliferation of digital banking and social media raises the risk of rapid bank runs.
Though Barr said the majority of banks that can borrow from the discount window already have legal agreements in place, many had not recently tested their discount window before the bank failures.
“Engaging in testing through actual transactions at regular intervals is a key component of operational readiness,” he added. “In the case of some banks, the amount of collateral prepositioned was also a tiny fraction of potentially flight-prone liabilities going into the stress event.”
Barr’s comments came several months after the FDIC, Federal Reserve, Office of the Comptroller of the Currency and the National Credit Union Administration called on banks to incorporate the discount window into their contingency funding plans. According to a July 28 addendum to a joint statement, banks should prepare to use the discount window by periodically reviewing and changing their contingency funding plans as market conditions and strategic initiatives change.
Regulators have also urged banks to be aware of the necessary steps to secure capital from contingency funding sources — potential counterparties, the availability of collateral and contact details.
Though banks have expressed concern that accessing the discount window could result in negative feedback from their supervisors, the Federal Reserve has stressed that using the option is not to be viewed negatively. Research has established that banks were willing to pay a premium to avoid using the discount window during the 2007-08 Financial Crisis. In 2020, the Fed lowered the Primary Credit interest rate by 1.5 percentage points to 0.25 percent, which was viewed as a way for policymakers to reduce stigma surrounding the program. “Banks need to be ready and willing to use the discount window in good times and bad,” Barr added.
In the days following the March failures of Signature Bank and Silicon Valley Bank, banks borrowed nearly $153 billion from the discount window. “The ability to access funding at a predictable rate through the discount window should figure importantly into banks’ liquidity risk management under a range of scenarios,” Barr said.
He attributed the failures of Silicon Valley Bank, Signature Bank and First Republic Bank to liquidity crises caused by substandard interest rate and liquidity risk management policies. “They faced old-fashioned bank runs, the speed of which was anything but old-fashioned,” Barr added. “Despite their compliance with our capital rules, these banks lacked enough capital to reassure insured depositors that they had sufficient resources to weather this liquidity storm.”