While the Federal Reserve System has already taken some steps to improve the functionality of the discount window, more work needs to be done to make the process more efficient, writes the American Bankers Association (ABA).
Similarly, prudential regulators need to work with the Federal Home Loan Banks’ (FHLBs’) regulator, the Federal Housing Finance Agency, to ensure that there is a clear understanding of the role that the FHLBs play in meeting both day-to-day funding needs and emergency funding especially since emergency funding needs can arise with lighting speed given modern technology.
ABA has proposed one potential solution: a draft term sheet that will allow for collateral to be transferred easily from FHLB to the discount window and back again. This change would be one of several options for banks, and link with other bank funding sources, and would, together with other necessary changes by the FHLBs and Fed banks, allow banks to seamlessly and quickly move collateral between the discount window and FHLB, receiving funding against that collateral in a fast and efficient manner.
“ABA strongly supports the current effort to ensure all banks have access to adequate and ready sources of liquidity through the normal course of business as well as during stress events. Establishing consistent agreements among the 12 Federal Reserve Banks and the 11 FHLBs so that collateral can be moved quickly when needed would significantly improve interoperability. Banks need to be able to easily move collateral to the discount window in a crisis and easily and quickly move it back to the FHLBs once the crisis has passed so as not to tie up valuable collateral and deter banks’ ability to lend when credit is most needed,” the ABA wrote in an article.