The Federal Reserve discount window is an essential component of liquidity risk management, but several reforms must be made to meet the needs of banks of all sizes, the American Bankers Association said today in comments to the House Financial Services Subcommittee on Financial Institutions and Monetary Policy, which held a hearing on the discount window and emergency lending.
In its comments, ABA listed several issues with the discount window and possible reforms. The first would be to resolve the potential mismatch between when a bank has liquidity needs and the speed at which the Fed can supply the needed funds. The current East Coast-centric operating times for the discount window are ill-suited to meeting banking needs in a 24/7 world, the association said. Another reform would be to improve the transparency of the Fed’s collateral pricing to ensure banks understand their borrowing capacity and what is driving changes to collateral valuation, ABA said.
The association further suggested using lessons learned from the Bank Term Funding Program created after last year’s bank failures as a guide to experiment with discount window parameters, including offering face value on high-quality securities, eliminating haircuts, experimenting with maturity terms and considering alternative interest rates. It also stressed that the Fed should do more to reduce the stigma for banks that use the window. Finally, ABA said that efforts to improve the discount window should not undermine or disadvantage other important sources of liquidity, such as the Federal Home Loan Bank system or lock-up high-quality collateral at the Fed.
Lawmakers worry AI could fuel future bank runs
During the hearing, subcommittee members voiced concern that the rise of new artificial intelligence technologies could exacerbate the speed of future bank runs by producing convincing misinformation or even taking the decision of whether to pull money from a bank out of a person’s hands.
“I’m afraid we’re soon going to be living in a world where individuals and artificial intelligence financial advisors on their phones will be continuously monitoring social media buzz, seeing if the bank in which you have your deposits looks like it’s rumored to be getting in trouble, and pulling your money,” Rep. Bill Foster (D-Ill.) said. “We’re talking about something that will proceed not at the speed of social media, but at the speed of artificial intelligence, and we have to make sure that we have some defense against this.”
Rep. Blaine Luetkemeyer (R-Mo.) raised the prospect of bad actors short selling a bank’s stock and then using AI to create deepfake videos of a well-known investor falsely claiming the bank is in trouble, which is then spread through social media. “We live in a different world where this instantaneous ability to do things today is such that we have to have this instantaneous ability to react,” he said. “If we don’t, I’m fearful.”