A possible proposal to require some banks using the Federal Reserve’s discount window to post collateral equivalent to a large percentage of their uninsured deposits “seems dangerous,” FDIC Vice Chairman Travis Hill said Wednesday.
Speaking at an American Enterprise Institute event, Hill addressed possible changes to bank liquidity rules and the discount window in response to last year’s failures of Silicon Valley Bank and two other institutions. No proposals have been made public, but Hill noted the Fed is reportedly exploring allowing banks to make funding requests electronically to the discount window rather than by phone, as well as expanding the window’s hours of operation. Both would be necessary but “inefficient” steps, he said.
Another potentially more far-reaching proposal would require larger banks to maintain a minimum ratio of cash plus discount window borrowing capacity to uninsured deposits set at some value below 100%. Media reports have suggested the ratio could be set around 40%. Hill said that while setting some incentives or requirements for banks to borrow from the discount window is worth considering, “setting this type of hardwired ratio seems dangerous. “
“Whereas a ratio above 100% may remove the first mover advantage (at least temporarily), a ratio under 100% amplifies it, by shining a magnifying glass on the fact that a bank cannot cover every depositor,” Hill said. “If SVB’s management said to its uninsured depositors on March 8, 2023, ‘Don’t worry, we have 40% coverage of our deposits,’ I suspect the reaction from depositors would have been something like, ‘We better make sure we are part of the 40%, and not part of the 60%!’”
Brokered deposits
Hill also said that while the Fed is seeking to encourage more discount window borrowing for banking experiencing funding stress, the FDIC “may push further” to prohibit the use of brokered deposits for the same purpose.
The current regulatory framework for brokered deposits was established in 1989, Hill said. He believes that framework “is no longer fit” for its purpose. Among other things, whether a deposit comes to a bank through an intermediary is not a key test in determining its risk, he said. “For example, SVB suffered a deposit run in part because it relied heavily on large, concentrated, closely networked, uninsured depositors. Whether any such deposits came in through intermediaries was not a relevant factor. In fact, when SVB failed, not a single one of its deposits was reported as brokered.”
Regulators should instead make an effort to modernize how they think of a bank’s funding mix, “and to think more holistically about how we view a bank’s deposit franchise,” Hill said. “We could consider doing a new study on deposits similar to the FDIC’s 2011 study, though hopefully with a more open mind about brokered deposits. And I continue to be skeptical of sweeping policies restricting a bank’s access to certain sources of liquidity as its condition deteriorates.”
