FDIC Vice Chair Travis Hill is apprehensive of requiring banks to prepledge discount window funding..Speaking July 24, Hill described his views on potentially requiring banks to have an approximately 40 percent ratio of total bank cash plus central bank borrowing capacity to runnable liabilities. "While I think establishing some incentives or requirements for banks to establish access to, preposition collateral at, and borrow from the discount window is worth considering, setting this type of hardwired ratio seems dangerous," Hill added. .He said it is more logical for banks to incorporate discount window capacity into liquidity coverage ratios. Doing so reduces the need for large banks to buy increasingly large amounts of securities, Hill said, while incentivizing more financial institutions to preposition collateral at the discount window. He also called for regulators to have real-time access to the flow of interbank payments through Automated ClearingHouse and FedWire. ."If a bank run unfolds at supersonic speed, as occurred at Silicon Valley Bank, the discount window is likely to be the only game in town, as only the central bank can create liquidity at scale immediately," Hill added. "Even if the run at SVB had occurred over the course of days rather than hours, rapidly liquidating its huge portfolio of securities to meet outflows would have been impractical and extremely disruptive to markets — as the FDIC learned firsthand when we assumed and later sold off that same securities portfolio.". Federal Reserve Gov. Michelle Bowman has also expressed caution at mandating use of the discount window. Earlier this year, she said mandating use will not ease the stigma of using the program and could make it harder for banks to manage daily liquidity needs while not addressing existing operational and technical shortcomings. Bowman called on the Federal Reserve to instead improve its technology or extend business hours for the discount window, FedWire and ACH in times of stress..A bill introduced earlier this month by Sen. Mark Warner (D-Va.) would require banks with more than $100 billion in assets to test borrowing at the discount window on a quarterly basis, while regional banks would need to test borrowing semi-annually. Regulators undertaking liquidity preparedness evaluations would be required to credit banks that demonstrate they can successfully use the discount window and have pre-pledged collateral. ."The failures of Silicon Valley Bank and Signature Bank last year highlighted the urgent need to reform the Federal Reserve's discount window for the 21st century economy, where bank runs can occur over hours, rather than days," said Warner, a member of the Senate Committee on Banking, Housing and Urban Affairs. "My legislation will implement key reforms to make sure that banks can actually use the discount window, reduce the unnecessary stigma associated with that use, and improve the window's operations to meet the challenges of the digital age." .Regulators have urged banks to better prepare for potential use of the discount window since the failures of Silicon Valley Bank and Signature Bank in March 2023. The two banks didn't use the discount window before collapsing. Timely discount window borrowing would not have saved the two banks but could have slowed the bank runs and weakened contagion risks, according to the Yale Program on Financial Stability.
