The Federal Reserve’s top bank watchdog wants lenders to be more comfortable turning to the central bank’s discount window.
Michael Barr, the Fed’s vice chair for supervision, touted the backstop as an important tool for financial stability and monetary policy. In prepared remarks for a European Central Bank event on Friday, he said the lenders should use the window in good times and bad.
“The ability to access funding at a predictable rate through the discount window should figure importantly into banks’ liquidity risk management plans under a range of scenarios,” he said.
Where banks turn for funding under stress became a topic of debate in the US after several midsize lenders failed earlier this year. A recent government report called for Federal Home Loan Banks, another source of funding, to direct lenders to the Fed in times of extreme stress.
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Barr said on Friday that it was important that lenders have a range of options for accessing liquidity. The “discount window borrowing should be an important part of this mix,” he added.
Barr acknowledged that some lenders are concerned about negative feedback from regulators if they are only borrowing from the discount window because the loans are cheap and convenient.
“In light of this, we at the Federal Reserve have been underlining the point to banks, supervisors, analysts, rating agencies, other market observers, and the public, through numerous channels, that using the discount window is not an action to be viewed negatively,” Barr said. “Banks need to be ready and willing to use the discount window in good times and bad.”
