Greater supervisory attention is needed on banks with less stable deposits, said Secretary of the Treasury Janet Yellen last week.
Speaking Sept. 26 during the Treasury Market Conference in New York City, Yellen called for long-term debt requirements to be increased for regional banks following the failures of Silicon Valley Bank and Signature Bank in the spring of 2023.
“We also need changes so that banks are better prepared for liquidity stress, such as making sure that they have diverse sources of contingency funding and especially that they have the capacity to borrow at the discount window and periodically test this capacity,” Yellen said. “This includes considering establishing collateral pre-positioning requirements to facilitate borrowing from the discount window, improving the discount window’s operational capacity, and enhancing coordination between the discount window and the Federal Home Loan Banks.”
Federal Reserve Gov. Michael Barr also expressed support for using the discount window in times of stress during the conference. More than $1 trillion in additional collateral has been pledged at the discount window since the bank failures, and more banks have access to the Fed’s standing repo facility. “Both of these facilities are potential venues for monetizing assets and raising liquidity to address volatility in private funding market rates or gaps in the availability of private-market funding,” Barr added.
The Federal Reserve is exploring requiring larger banks to maintain a minimum level of immediately available liquidity with a pool of reserves and prepositioned collateral at the discount window based on a percentage of their uninsured deposits. Community banks would not be included in the proposal.
The Treasury Department successfully prevented spillover from the failures of Silicon Valley Bank and Signature Bank, Yellen said. Following the failures, Yellen invoked the systemic risk exception, while the Federal Reserve established the Bank Term Funding Program to limit contagion.
Yellen’s speech also touched on nonbanks and artificial intelligence. Last November, FSOC updated its guidance on how the council designates a nonbank financial company for Fed supervision and prudential standards. The Treasury is monitoring AI adoption, identifying vulnerabilities and assessing whether new regulations are necessary to monitor risks posed by the emerging technology.
