To address the lessons about liquidity learned in the spring of 2023, the Federal Reserve is exploring targeted adjustments to its current liquidity framework, said vice chair for Supervision at the Fed, Michael Barr in a recent speech.
“We are exploring a requirement that larger banks maintain a minimum amount of readily available liquidity with a pool of reserves and pre-positioned collateral at the discount window, based on a fraction of their uninsured deposits,” he said.
Community banks would not be covered, and the Fed would take a tiered approach to the requirements. The collateral pre-positioned at the window could include both Treasury securities and the full range of assets eligible for pledging at the discount window.
“Incorporating the discount window into a readiness requirement would also reemphasize that supervisors and examiners view use of the discount window as appropriate under both normal and stressed market conditions,” he said.
The Fed is also reviewing the treatment of a handful of types of deposits in the current liquidity framework. Observed behavior of different deposit types during times of stress suggests the need to recalibrate deposit outflow assumptions in the rules for certain types of depositors. The central bank is also revisiting the scope of application of its current liquidity framework for large banks.
“These enhancements to our liquidity regulations will help bolster firms’ ability to manage liquidity shocks, and they will also be well integrated with our monetary policy tools and framework,” he said.