FDIC Weighs Letting Banks Count Discount Window Capacity Toward Liquidity Buffers
By CU Today Staff —
WASHINGTON—Federal Deposit Insurance Corp. Chairman Travis Hill said the agency is exploring whether banks should be allowed to count some of their borrowing capacity at the Federal Reserve's discount window toward regulatory liquidity requirements, a potential shift that could reshape how institutions manage liquidity risk. Hill outlined the concept during the June 17 New York Banking Summit, saying discussions are in the early stages and involve coordination with other banking regulators and the Fed, American Banker reported.
Under the idea, banks would not replace traditional high-quality liquid assets (HQLA) such as cash and Treasury securities, but could receive partial credit for maintaining operational readiness to borrow from the Fed's discount window. Hill argued that the 2023 failure of Silicon Valley Bank demonstrated how quickly deposit outflows can overwhelm a bank's ability to sell securities, making the central bank the only realistic large-scale source of liquidity during a rapid run, American Banker explained.
The proposal also aims to address the long-standing stigma associated with discount-window borrowing. Hill said regulators are considering ways to encourage routine use of the facility or make it harder for markets and the public to identify when a bank accesses the window. The chairman acknowledged that solving the stigma problem will be difficult because borrowing is often viewed as a sign of financial stress, American Banker said.
The concept has gained support from some policymakers and industry groups following the banking turmoil of 2023. Last month, Sens. Mark Warner and John Kennedy introduced bipartisan legislation that would require regulators to give positive consideration to banks that demonstrate discount-window readiness through testing and pre-positioned collateral. Industry advocates have similarly argued that recognizing discount-window capacity in liquidity rules would provide a more realistic measure of available liquidity while encouraging banks to maintain access to the Fed's lender-of-last-resort facility.
Originally reported by CU Today.