The speed at which deposits left Silicon Valley Bank and Signature Bank, as well as concerns regarding banks’ ability to monetize their liquidity buffers, suggest that it may be necessary to reexamine requirements regarding self-insurance standards and discount window preparedness, Federal Reserve Vice Chairman for Supervision Michael Barr said today.
Speaking at an economic conference in Germany, Barr discussed lessons learned about liquidity risk management following the bank failures in March. He noted that after the 2008 financial crisis, policymakers required large institutions to maintain buffers of high-quality liquid assets that could be converted to reserves in times of stress. But the recent failures “highlighted the fact that, in practice, there can be operational impediments to a bank’s ability to monetize its liquidity buffers in large volumes and in a rapid time frame in acute stress,” he said.
Barr also emphasized the importance of contingency funding plans in liquidity risk management for banks of all sizes, highlighting the discount window as an important source of contingent liquidity. Barr also noted that “using the discount window is not an action to be viewed negatively” and banks should be prepared to use the discount window “in good times and bad.”
Barr said SVB and Signature Bank “faced internal operational challenges in quickly identifying and moving collateral that would have provided them additional borrowing capacity at the discount window.” He noted that a majority of banks have legal agreements in place to borrow from the discount window, but most had not recently tested their discount window access before the failures and resulting market stress. “Engaging in testing through actual transactions at regular intervals is a key component of operational readiness,” Barr said.