The Economic Outlook, Monetary Policy, and the Demand for Reserves
Vice Chair for Supervision Randal K. Quarles
February 6, 2020
At the Money Marketeers of New York University, New York, New York
I would like to thank the organizers for the opportunity to speak to you today. My plan is to address some topical and important issues, some of which are quite technical but technicalities that I think can have significant consequences.1 After providing my thoughts on where the economy and monetary policy are now, I will turn to what we can expect from monetary policy in the years to come.
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The discount window is meant to be used by healthy banks when it is needed. While there has long been discussion about how the discount window is “broken” because of stigma about using it, we know it is still an important part of firms’ contingency planning and preparations. Banks currently pledge over $1.6 trillion in collateral to the discount window, which means that banks have gone to the trouble of working with their local Reserve Bank to make sure they have access to the window, if needed, and they have set aside a portion of their balance sheets as collateral to do so.
We have also already publicly clarified in the 2019 resolution planning guidance that firms can assume discount window access in their Title 1 plans if they can meet the terms for borrowing, such as recapitalizing the bank subsidiary.
We could build on this approach by also allowing firms to rely on the discount window in their ILSTs as a means of monetizing, for example, Treasury securities in their scenarios. This approach would acknowledge a role for the discount window in stress planning, improve the substitutability of reserves and Treasury securities in firms’ HQLA buffers, and maintain the overall level of HQLA that firms need to hold. Such an approach could improve the efficiency of monetary policy implementation, as firms might show a greater willingness to reallocate to Treasury securities, reducing reserve demand and improving market functioning.
An additional advantage of such an approach is that it could further improve the incentives of firms to be prepared to use the discount window, which we already know is important for contingency planning. If firms were to include the discount window in their plans for how they will weather a stress scenario, they would also need to demonstrate to supervisors that they are prepared to use it to ensure that their plans are credible. Also, with this approach, we would not need to set up any new programs. In connection with this, we are closely examining how international counterparts treat the equivalent of discount window access in their banks’ stress-planning scenarios.
The full speech is available at https://www.federalreserve.gov/newsevents/speech/quarles20200206a.htm