(Bloomberg) -- Two Federal Reserve leaders suggested the central bank should assess how readily its emergency lending facility is able to address liquidity needs in the banking system.
The facility, known as the discount window, has come under scrutiny following a banking crisis in 2023 that included the failures of Silicon Valley Bank and Signature Bank.
“When it comes to the next steps in liquidity reform, I think it is imperative that we tackle known and identified issues that were exposed during the banking stress in the spring of 2023,” Fed Governor Michelle Bowman said in prepared remarks Thursday at a conference at the Dallas Fed. “This must include updating discount window operations and technology and making sure that payment services are available when needed.”
Speaking at the same two-day conference on bank funding sponsored by both the Federal Reserve Banks of Dallas and Atlanta, Dallas Fed president Lorie Logan also suggested the central bank is due for an examination of the discount window.
“Our last full review of the discount window function took place more than 20 years ago,” she said. “By examining our approach to discount window lending in the current environment and in light of recent experience, we can ensure the window continues to provide ready access to liquidity going forward.”
Bowman said some banks have encountered frictions accessing the discount window, which potentially exacerbated the stress they experienced. She said changes were needed to modernize discount window lending and payment services, such as updating the technology banks use to request loans.
Earlier Thursday, Logan repeated a plea for all banks to sign up for the Fed’s emergency lending facility, noting that institutions need to continue to test their operational readiness.
Policymakers have argued that access to it, and ability to use it in a time of stress — through periodic testing — could prevent larger problems such as the regional banking failures of last year.
“Every bank in America should be fully set up at the window as part of its liquidity toolkit,” Logan said.
Logan noted that more than 5,000 depository institutions have completed the necessary documentation to sign up for discount window access, and that $3 trillion in collateral has been pledged, up $1 trillion from last year.
Deposit Insurance
Logan also said the current federal deposit insurance limit may be too low, especially in the wake of the turmoil in the US banking system last year.
The economy has “grown substantially” since Congress last raised the limit to $250,000 in 2008, she said, adding that if the cap had increased in line with nominal gross domestic product it would be nearly $500,000 today. The need to protect depositors after the collapse of Silicon Valley Bank and Signature Bank also suggests that level is too low.
“This was clearly the right decision to protect the economy and financial system once the banks had failed,” Logan said. “But the need to provide insurance after the fact to depositors who weren’t supposed to receive it and whose banks had not been regulated as systemically important suggests to me the insurance limit was too low in the first place.”
She noted Congress would ultimately make any decision on this topic.
Logan, who spent the bulk of her career in the New York Fed’s markets group, said a higher cap could also stem the use of reciprocal deposit networks, which allow banks to swap deposits in excess of the limit with each other to provide depositors more insurance.
The gathering comes after officials at the central bank recently showed other US regulators a three-page document of possible changes to their bank-capital overhaul that could significantly lighten the load on Wall Street lenders. The revisions could alter key parts of the landmark proposal — including one that might have had a large effect on big banks with sizable trading businesses.
Regulation Views
On the regulatory front, Bowman said the failures of Silicon Valley Bank, Signature Bank and First Republic Bank are often brought up as “the basis for a number of matters on the current regulatory agenda.” But she says many risks identified during last year’s banking struggles weren’t new.
“Addressing concentration risk, interest-rate risk and liquidity risk are all key risks that have long been elements deemed critical for effective supervision in bank examinations,” she said. “These risks are known to create significant vulnerabilities and can be fatal to individual institutions if not managed appropriately over time.”
--With assistance from Ben Bain and Katanga Johnson.
(Updates throughout to add comments from Bowman.)
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