A requirement that larger banks maintain a minimum amount of readily available liquidity with a pool of reserves and pre-positioned collateral at the discount window, based on a fraction of their uninsured deposits, is being “explored” by the Federal Reserve, the agency’s top supervisor said Thursday.
Community banks would not be covered under the regulation, Federal Reserve Board Vice Chair for Supervision Michael Barr said. He added that the agency would “would take a tiered approach to the requirements.”
Speaking to the 2024 U.S. Treasury Market Conference of the Federal Reserve Bank of New York, in New York, Barr said the requirements for targeted adjustments to the Fed’s current liquidity framework under consideration come in the wake of “the lessons about liquidity learned in the spring of 2023.”
That year, three large regional banks failed following runs on deposits. Those banks were Silicon Valley Bank (SVB) of Santa Clara, Calif., which failed in March; Signature Bank of New York, N.Y., which also failed that month; and First Republic Bank of San Francisco, Calif., which failed in May. Uninsured deposits at all three institutions played a key role in their failures.
Since then, Barr said, many banking firms “have taken steps to improve their liquidity resilience.” However, he added that the regulatory adjustments under consideration would “ensure that large banks maintain better liquidity risk-management practices going forward.”
“Improvements to our liquidity regulations will also complement the other components of our supervisory and regulatory regime by improving banks’ ability to respond to funding shocks,” he said.
He said that, under the rules being developed, the collateral pre-positioned at the discount window could include both Treasury securities and the full range of assets eligible for pledging at the discount window.
“It is vital that uninsured depositors have confidence that their funds will be readily available for withdrawal, if needed, and this confidence would be enhanced by a requirement that larger banks have readily available liquidity to meet requests for withdrawal of these deposits,” Barr said.
He said that requirement would be a complement to existing liquidity regulations such as those that require an internal liquidity stress test (ILST) as well as meeting the liquidity coverage ratio (LCR).
“Incorporating the discount window into a readiness requirement would also reemphasize that supervisors and examiners view use of the discount window as appropriate under both normal and stressed market conditions,” he said.
Other areas under consideration, he said, included:
- A partial limit on the extent of reliance on held-to-maturity (HTM) assets in larger banks’ liquidity buffers, such as those held under the LCR and ILST requirements. The adjustments would address the “known challenges” of banks being able to use these assets in stress conditions.
- Reviewing the treatment of a handful of types of deposits in the current liquidity framework. “Observed behavior of different deposit types during times of stress suggests the need to recalibrate deposit outflow assumptions in our rules for certain types of depositors,” he said. “We are also revisiting the scope of application of our current liquidity framework for large banks.”
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