Two Federal Reserve officials both hinted: the need to reform the discount window tool
Federal Reserve Board Governor Bowman and Dallas Fed President Logan have proposed reforming the discount window tool to meet the liquidity needs of the banking system. They stated at a banking funding conference that there is a need to update discount window operations and technology, and ensure payment services are provided when needed. Logan also called on all banks to sign emergency loan arrangements and conduct test operation readiness. In addition, over 5,000 banks have signed discount window access agreements, with $3 trillion in collateral pledged. It is worth noting that although the discount window is a long-standing tool of the Federal Reserve, banks often avoid using it
According to the financial news app Smart Finance, Michelle Bowman, a member of the Federal Reserve Board, and Lorie Logan, President of the Federal Reserve Bank of Dallas, suggested that the Federal Reserve should assess to what extent its emergency lending tools can meet the liquidity needs of the banking system, implying the need to reform the discount window tool.
During a two-day bank funding conference jointly hosted by the Federal Reserve Bank of Dallas and the Federal Reserve Bank of Atlanta, Bowman stated, "Regarding the next steps in liquidity reform, I believe we must address the known and identified issues exposed during the banking crisis in the spring of 2023. This must include updating the operations and technology of the discount window and ensuring the provision of payment services when needed."
At the same conference, Logan hinted that the Federal Reserve will evaluate the discount window tool. Logan said, "The last time we conducted a comprehensive evaluation of the discount window was over 20 years ago. By studying the methods of discount window lending in the current environment and incorporating recent experiences, we can ensure that the discount window continues to provide convenience for future liquidity needs."
Bowman pointed out that some banks have encountered friction when using the discount window, which may exacerbate the pressure they are under. She stated that reforms are needed to modernize discount window lending and payment services, such as updating the technology used by banks to apply for loans.
Meanwhile, Logan once again urged all banks to sign the Federal Reserve's emergency lending arrangements and noted that institutions need to continue testing their operational readiness. Policymakers argue that through regular testing, the ability to obtain loans and use them in times of stress can prevent larger problems, such as regional bank failures last year.
Logan stated, "Every bank in the United States should have a discount window set up as part of its liquidity toolkit." She noted that over 5,000 depository institutions have completed the necessary paperwork to sign the discount window access agreement, and there has been $3 trillion in collateral pledged, an increase of $1 trillion from last year.
It is worth mentioning that although the discount window is a long-term tool for the Federal Reserve to stabilize the financial system during turbulent times, banks often avoid it because they are concerned that using the tool will send a troublesome signal to other financial institutions. This sense of shame is so strong that even though the Federal Reserve encourages banks to use the tool, they still hesitate in the most critical situations.
Last week, Federal Reserve Chairman Powell stated in his speech to the House of Representatives regarding the discount window, "We know the infrastructure is somewhat outdated, and we are investing in it to make it more user-friendly... This is a very big project." Powell added, "We hope people can freely use the discount window," but so far, the Federal Reserve has not made "much progress in making it a more attractive source of funding."
Deposit Insurance
Logan also mentioned that the current federal deposit insurance limit may be too low, especially after the turbulence in the U.S. banking industry last year. She stated that since the U.S. Congress last raised the federal deposit insurance limit to $250,000 in 2008, the U.S. economy has "grown significantly," and if the federal deposit insurance limit were to increase in line with nominal Gross Domestic Product (GDP), today it would be close to $500,000 After the collapse of Silicon Valley Bank and Signature Bank, the need to protect depositors also indicates that the current federal deposit insurance limit is too low.
Logan stated: "This is obviously the right decision to protect the economy and financial system after the bank failures. However, the need to provide insurance to depositors who should not have been insured afterwards, and these depositors' banks are not subject to systemically important regulation, in my view, indicates that the insurance limit was too low from the start." She added that Congress will ultimately make a decision on this issue.
However, Logan also noted that raising the federal deposit insurance limit could also hinder the use of reciprocal deposit networks. It is reported that reciprocal deposit networks allow banks to exchange deposits exceeding the limit to provide more insurance to depositors.
Regulatory Views
In terms of regulation, Bauman stated that the failures of Silicon Valley Bank, Signature Bank, and First Republic Bank are often seen as the "foundation of many issues on the current regulatory agenda." However, she pointed out that many of the risks discovered in the banking industry crisis last year are not new. Bauman said: "Addressing concentration risk, interest rate risk, and liquidity risk have long been considered key factors in effective regulatory bank examinations." "It is well known that these risks can lead to significant vulnerabilities, and if not managed properly in the long term, they could be fatal to individual institutions."