Remarks by Vice Chairman Travis Hill at the American Enterprise Institute “Reflections on Bank Regulatory and Resolution Issues”
Introduction
The past year and a half has been a pivotal time for the FDIC. With three of the four largest bank failures in U.S. history, longstanding questions have reemerged about how to address bank runs, and newer questions have emerged regarding how FDIC receiverships are funded. Today, I will offer thoughts on both of these topics, along with views on the FDIC’s approach to brokered deposits and a few thoughts on the path forward for the Basel III Endgame proposal.
Bank Liquidity and the Discount Window
The bank failures last spring sparked a conversation about the Federal Reserve’s discount window and bank liquidity rules, among many other topics. Many wondered how Silicon Valley Bank (SVB), with a huge stockpile of government bonds, was largely unable to borrow from the discount window before its failure. Subsequent reports from the Federal Reserve and FDIC on SVB and Signature Bank, respectively, described how both institutions were unprepared to do so.
The Federal Reserve was originally created to mobilize reserves, provide liquidity to banks, and reduce banking panics, with varying success over time. One prerequisite for this objective to succeed is that banks must be able and willing to use the liquidity facilities available. The lack of use is a multifaceted problem, but the less banks use the discount window in aggregate, the more stigmatizing it is when banks do use it, and the more reluctant supervisors are to allow banks to rely on it as part of their contingency planning.
As an initial step to address the issue, following stories of SVB’s frantic, last-minute efforts to borrow from the discount window, the Federal Reserve has reportedly been working on operational improvements to modernize the discount window’s antiquated operations, such as by allowing banks to make funding requests electronically rather than by phone and potentially expanding the hours of operation. These types of operational improvements seem like a necessary but insufficient step.
Another idea that has been under consideration is a discount window prepositioning rule. This concept is a derivation of Mervyn King’s “Pawnbroker For All Seasons” proposal, which would require a bank’s cash and central bank borrowing capacity to exceed all runnable.
|
