In remarks in New York last night, Federal Reserve Vice Chairman for Supervision Randal Quarles suggested that making reserves and Treasury securities more interchangeable from a liquidity regulation and supervision perspective could help improve the efficiency of the financial system and prevent sudden liquidity crunches in the markets, such as those that occurred last September.
He proposed several approaches that he said “do not involve any decrease in banks’ liquidity buffers” but that would “[facilitate] the use of [high-quality liquid assets] beyond reserves to meet the immediate liquidity needs projected in banks’ stress scenarios.” Quarles highlighted the role of the discount window in emergency liquidity provision and potentially equalizing the preference for treasuries over cash for purposes of contingent liquidity and supervisory liquidity buffers.
Another potential approach could be to set up a new program or facility, such as a standing repurchase agreement—something the Fed has previously explored—but Quarles added that “there may be benefits to working first with the tools we already have at our immediate disposal.”
He also addressed criticism from industry stakeholders about the surcharge for global systemically important banks—specifically, that its partial dependence on year-end inputs have exacerbated some of the liquidity challenges in the market. Based on a preliminary analysis, he said the data may support switching those inputs to averages and that the Fed is “actively considering” taking action to do so.
