Fed seeks input on discount window reforms

Samuel Corum/Bloomberg

The Federal Reserve is gathering public input on how to improve its last-resort lending facility.

The central bank launched a request for information on Thursday, asking the public to weigh in on how its discount window and the processes around accessing it might be improved. 

Specifically, the Fed is seeking input on operational practices such as the collection of legal documents, pledging — and withdrawing — collateral, and requesting, receiving and repaying loans from the facility. It has also invited commentary about its intraday credit program and related communications.

Banks and members of the public have 90 days to respond to the request for information.

The Fed has been under pressure to modernize the discount window since the failures of three large regional banks last year. 

According to post-failure reports, staffers from both Silicon Valley Bank and Signature Bank struggled to pledge appropriate collateral to the facility in a timely manner while facing significant deposit outflows in March 2023. The employees had difficulties moving assets that were prepositioned with the Federal Home Loan Banks — a more frequent source of liquidity for banks — and even attempted to post ineligible loans. 

While smoother experiences at the discount window would not have helped the banks stave off failure, government examiners concluded, they might have allowed for more orderly liquidations of the institutions. 

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In response to the episode, regulators issued joint guidance on best practices for discount window readiness. Vice Chair for Supervision Michael Barr, the Fed's chief regulator, has also addressed the topic in speeches and public appearances, urging banks to make the discount window part of their emergency liquidity plans. 

In March, Barr said these efforts resulted in a $1 trillion uptick in assets pledged to the discount window, bringing the overall total to $3 trillion. While much of this additional prepositioning has largely been driven by the urging of supervisors, there has been some discussion of making it mandatory. 

Acting Comptroller of the Currency Michael Hsu, in a January speech, suggested requiring large banks to prepledge enough assets to cover a "ultra short term, acute outflows" of deposits — adding a five-day liquidity mandate to the 30-day requirement already called for by the liquidity coverage ratio. He said an obligation to both prepledge collateral and test borrowing capabilities regularly would eliminate the stigma associated with discount window use.

But not all regulators are sold on the idea. Fed Gov. Michelle Bowman said in April that it was a fool's errand to attempt to "eliminate discount window borrowing stigma through regulatory fiat." She said forcing banks to tie up assets at the facility could hinder their ability to make loans or otherwise foster financial activity.

"While it may be appropriate for supervisors to encourage banks to test contingency funding plans and to evaluate whether those plans are adequate in the context of examination, we must be cautious to not cross the line from supervisor to member of the management team and to avoid interfering with the decision making of bank management by mandating across-the-board changes in response to the failure of a single unique institution," Bowman said in a speech.