Bet_Noire
In discussing potential changes to improve liquidity for banks in times of stress, Federal Reserve Governor Michelle Bowman said the central bank should consider whether banking institutions should be required to hold collateral at the Fed's discount window before they actually need to access such loans in the future.
Bowman spoke Wednesday morning at the Committee on Capital Markets Regulation Roundtable on Lender of Last Resort in Washington, DC. The proposal to require banks to be ready to borrow from the discount window echoed remarks by Cleveland Fed President Loretta Mester last month.
The Federal Reserve's discount window serves as "lender of last resort" to banks experiencing liquidity crunches; however, its use has also carried a stigma, hinting that banks that use the window are in trouble.
In addition to the stigma, there have also been issues with banks accessing the discount window. For example, Silicon "experienced difficulty in accessing the discount window before its failure," Bowman said.
"Are there operational issues that can be improved, whether by improving the technology or extending business hours for the discount window and other Reserve Bank payment services like FedWire and ACH (automated clearinghouse), particularly during times of stress?," she asked. The central bank needs to take a close look at its operational readiness and capacity, Bowman added.
She concluded: "We should continue to focus on improving the targeted approach of supervision, to enhance the 'prevention' of banking system stress. We should think about the liquidity framework in a broad-based manner to ensure that the available tools, resources, and requirements are working in a complementary way. And we should understand what changes we need to make discount window lending and other emergency lending programs more efficient and effective."
Recall that about a year ago, some regional banks came under stress as the value of their security holdings dropped amid a higher-for-longer interest rate environment. Some regional bank tickers include: PNC Financial Services (PNC); New York Community Bancorp (NYCB); Axos Financial (AX), KeyCorp (KEY), Regions Financial (RF), Bank OZK (OZK), Western Alliance Bancorporation (WAL), Metropolitan Bank Holding (MCB), Zions Bancorporation (ZION).