(Bloomberg) -- Federal Reserve Governor Michelle Bowman says the central bank should weigh whether discount-window borrowing capacity should be recognized in reviews of lenders’ liquidity resources.

“We should explore ways to validate the use of discount window lending in our regulatory framework,” Bowman said in a speech Wednesday in Washington. “While the federal banking agencies have encouraged institutions to be prepared to access discount window loans, we should also seriously consider whether we should finally recognize discount window borrowing capacity in our assessment of a firm’s liquidity resources, including in meeting a firm’s obligations under the Liquidity Coverage Ratio.”

Bowman spoke after the one-year anniversary of the failures of Silicon Valley Bank and Signature Bank, saying the Fed must take a close look at the issues around liquidity access, bank supervision and deposit insurance.

 

Regulators, including the Fed, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp., are drafting a plan to require that banks tap the facility at least once a year, a measure aimed at reducing the stigma for users. That follows guidance from the regulators last year urging institutions to update their contingency funding plans, including for the discount window. 

Banks have long complained about access to the discount window as part of their long-term liquidity planning, but see tapping the facility as a last-resort option. The Fed and other bank watchdogs want to address this stigma by mandating that lenders run tests to tap the discount window more regularly and ahead of a severe liquidity demand, Bloomberg has reported.

Read more: US Prepares Rule Forcing Banks to Tap Fed Discount Window

Although there have been previous attempts to revamp the window, it requires buy-in from every level of the financial system and its overseers — including banks, supervisors, analysts, ratings agencies and market participants. Many of them have longed eyed the facility with suspicion. 

BTFP Flaws

Ultimately, Bowman sees an opportunity to consider the design of all the central bank’s lender-of-last-resort tools, especially after flaws were uncovered in the last months of the Bank Term Funding Program’s existence. 

The BTFP, established last year to restore confidence in the financial system after the collapse of Silicon Valley Bank, stopped providing loans on March 11. Although it was a solution to one of the financial system’s main challenges of 2023 — giving banks and credit unions the ability to borrow funds for as long as a year — the program drew criticism in its waning months when institutions started tapping it to fund an arbitrage opportunity. That prompted the Fed to increase the cost to borrow through the facility in January.

From Jan. 1 to Jan. 24, the day before the changes to the facility took effect, usage surged about $38.6 billion from $129.2 billion at year-end, according to a Wrightson ICAP analysis of Fed financial statements released March 26. Breakdowns of the weekly Fed data for that period suggest banks in the Fed’s San Francisco district were “power users,” accounting for $8 billion of the growth. 

“We must learn from this experience,” Bowman said. “When we identify flaws in program design or ways to improve our tools in the future, we should avail ourselves of the knowledge we have learned through experience.” 

(Updates starting in fourth paragraph with details from speech.)

©2024 Bloomberg L.P.