When it comes to liquidity reform, it is imperative that regulators tackle “known and identified issues” that were exposed during last year’s bank failures, but for reforms beyond that, “a number of important questions remain unanswered,” Federal Reserve Governor Michelle Bowman said today.
Speaking at a research conference in Dallas, Bowman said regulators must consider how to operationally enhance and optimize tools such as the discount window to meet banking system liquidity needs more effectively. She added that Silicon Valley Bank had trouble accessing the discount window before its failure. The Fed is currently seeking public comment on a proposal to expand the operating hours of the Fedwire Funds Service and National Settlement Service to 22 hours a day, seven days a week, she noted. “The proposal also requested feedback on whether the discount window should operate during these same expanded hours.”
“Other changes are also needed to bring payment services and discount window lending into the 21st century, including modernizing the technology banks use to request loans electronically rather than relying upon a person to answer a telephone call, ensuring that collateral can move freely from the bank or [Federal Home Loan Bank] to the Reserve Bank when needed, and identifying and reducing other areas of friction that banks experience in the use of the discount window,” Bowman said.
However, Bowman said that questions remain about other liquidity reforms proposed since last year’s bank failures, such as a requirement banks to preposition collateral at the Fed’s discount window. She also questioned the appropriateness of making liquidity reforms while the Federal Housing Finance Administration is shifting FHLB funding prioritization for its members.
“When it comes to the next steps in liquidity reform, I think it is imperative that we tackle known and identified issues that were exposed during the banking stress in the spring of 2023,” Bowman said. “This must include updating discount window operations and technology and making sure that payment services are available when needed. But for other reforms, a number of important questions remain unanswered, including understanding both where there are frictions and weaknesses in the current bank funding landscape, and what the potential impact—including intended and unintended consequences—of these reforms on the banking industry could be.”
