Saying that bank liquidity is “the next big-ticket item” for regulatory reform, top officials at the Treasury Department and Federal Reserve today outlined their case for revisiting the liquidity coverage ratio to recognize discount window borrowing capacity.
In prepared remarks for a Washington, D.C. roundtable on bank liquidity, Treasury Secretary Scott Bessent said the current framework for regulating liquidity, created in response to the 2008 financial crisis, “has excessively and unnecessarily limited banks’ ability to do what they are supposed to do — lend.”
“Requiring banks to fully self-insure even severe liquidity risk comes at a steep cost,” Bessent said. “When 25% of large banks’ balance sheets are allocated to safe assets — up from roughly 10% before the crisis — that necessarily means less lending for mortgages, small businesses, [artificial intelligence] hyperscalers and critical infrastructure.”
Bessent also said the framework drives banks to exhaust regulatory buffers before accessing the discount window, entrenching the public stigma of using it. “If you only go to the window when things are really bad, then going to the window signals that things are really bad,” he said.
The liquidity coverage ratio requirements and other liquidity rules should give appropriate capped recognition of borrowing capacity associated with collateral prepositioned at the discount window, Bessent said. “This reform would help rebalance the boundary between self-insurance and the lender of last resort.”
Bessent added that regulators could explore whether the cap should be sized for each bank based on the bank’s demonstrated usage of the discount window. Regulators could also explore a mechanism to adjust the cap during severe stress, he said.
Discount window ‘underutilized’
Fed Vice Chair for Supervision Michelle Bowman raised similar concerns, arguing that the discount window “is a critical but underutilized tool.”
“After years of recognized flaws, we have yet to address these known weaknesses,” Bowman said. “The consequences are clear. Banks create additional buffers by hoarding high-quality liquid assets rather than lending. This liquidity hoarding reduces credit availability to the economy. In addition, by increasing the demand for reserves, it also requires the Fed to maintain a larger balance sheet to meet that demand.
“Some see tension between monetary policy implementation tools and regulatory objectives,” she added. “In my mind, these goals should be compatible if we are modernizing the discount window to serve as an effective liquidity backstop, instead of a theoretical option.”
ABA: Liquidity framework reassessment needed
In a statement, American Bankers Association President and CEO Rob Nichols thanked Bessent and Bowman for recognizing the need to reassess the current bank liquidity framework.
“A resilient financial system depends on access to diverse and reliable sources of liquidity, and when the flow of liquidity is unintentionally constrained due to poorly calibrated regulations, households and businesses across the country feel the consequences,” Nichols said. We look forward to reviewing any potential changes in detail with our members and continuing to engage constructively with policymakers to ensure the discount window aligns with market practice and meets the needs of banks of all sizes.
