A proposal to require banks to hold collateral at the Federal Reverse discount window in anticipation of the need for accessing discount window loans in the future would be a radical shift in policy with possible unintended consequences, Federal Reserve Governor Michelle Bowman said today. During a roundtable event in Washington, D.C., Bowman spoke about bank liquidity and the Fed’s role as lender of last resort following the 2023 failure of Silicon Valley Bank. Bank regulators are planning to introduce a package of liquidity regulations later this year in response to last year’s bank failures, including possible changes to the Fed discount window.
One proposal floated by Acting Comptroller of the Currency Michael Hsu is some form of pre-positioning requirement for the discount window. Bowman said regulators currently do not fully understand the consequences of a new pre-positioning requirement or, given the unique nature of SVB’s business model and lax supervision, whether other institutions would have similarly runnable uninsured deposits or if SVB’s failure was an idiosyncratic event. She also said there remained many unanswered questions about whether such a requirement would impede a bank’s ability to manage its liquidity needs, if it would increase operational risk or lead to unintended consequences for banks, or if it is even warranted.
“These are all important but as yet unanswered questions that need to be explored and understood before imposing such a radical shift,” Bowman said.
Bowman also said that as bank regulators consider possible new rules to mitigate the effects on the banking industry from future market shocks, they should seek to optimize the functioning of their current liquidity tools and identify the key challenges in making those tools effective. ABA in February raised similar concerns, arguing that it is essential that agencies gather and analyze sufficient data and information before releasing a proposed rule or guidance on liquidity.
