Senior Fed Official Preheats New Regulations for Banks: Providing the Lowest Liquidity Guarantee for Uninsured Deposits to Cleanse the Stigma of Discount Window

Senior officials from the Federal Reserve are warming up for the upcoming new liquidity regulations for banks, implying in recent speeches the need to adjust the liquidity framework to protect uninsured deposits not directly guaranteed by the government, and to make it easier for banks to accept the Fed's main emergency lending tool - the discount window.

During a speech at the 10th U.S. Treasury Market Conference at the New York Fed on Thursday, September 26th, Federal Reserve Vice Chairman Michael Barr, responsible for financial regulation, revealed that regulatory agencies are studying a requirement for large banks to establish a "reserve and pre-arranged collateral pool" based on a small portion of their uninsured deposits at the discount window to maintain a minimum level of readily available liquidity. This requirement implies that the new regulations from regulators will require banks to link uninsured deposits to minimum liquidity.

Barr said:

"Uninsured depositors need to have confidence that their funds will be available for withdrawal at any time, which is crucial. By requiring large banks to have readily available liquidity to meet the demands for withdrawing these deposits, this confidence will be stronger."

Barr further stated that this requirement would be a supplement to existing liquidity regulations. This refers to the Fed's current liquidity stress tests and liquidity coverage ratio requirements for banks.

Barr mentioned that community banks would not be subject to the regulatory scope of the new rules mentioned above. Regulators will meet the requirements in a "layered manner," with collateral pre-deposited at the discount window including U.S. Treasuries and "all assets eligible for pledging at the discount window."

Barr also believes that banks should dispel concerns about using the discount window to obtain liquidity, encouraging banks to use it when appropriate. He said:

"We believe that if, from a financial perspective, banks have a reason to use the discount window, then using it is a completely acceptable normal part of any bank's financing needs."

Barr stated that the Fed is trying to eliminate the long-standing stigma surrounding this key Fed lending tool.

"The stigmatization of the discount window has been around for a long time. Some are concerned that using the discount window may be seen as a sign of weakness. But we don't see it that way."

Commentators believe that Barr is implying that using the discount window will not be seen by regulators as a sign of liquidity problems at banks.

During the Q&A session at the aforementioned New York Fed conference, Barr revealed that the new banking regulations related to the considerations mentioned above may be announced later this year or early next year