By Michael S. Derby
NEW YORK (Reuters) – Dallas Federal Reserve President Lorie Logan said on Thursday the U.S. central bank is making progress in making sure banks can tap Fed emergency liquidity if needed.
The Fed’s “discount window,” which stands ready to lend to deposit-taking banks, along with other central bank liquidity tools, have been “effective in supporting the stability of the banking and financial systems and, in turn, the flow of credit to households and businesses,” Logan said in the text of a speech to be presented at an event at her regional Fed bank.
“However, the payments and financial systems, the economy, and technology continue to evolve rapidly” and the Fed and banks need to adapt to those changing circumstances, she said.
“A critical element” of ensuring the safety of the banking system is making sure banks are prepared to use the discount window if circumstances call for it, Logan said, adding “in my opinion, every bank in America should be fully set up at the window as part of its liquidity toolkit.”
And to that end, there has been progress, the Dallas Fed chief said. She noted that more than 5,000 deposit-taking banks have done the necessary paperwork to access the discount window and banks have pledged $3 trillion in collateral for potential loans, up from $1 trillion last year.
While the discount window is a longstanding part of the Fed’s toolkit to stabilize the financial system in the case of turbulence, it has often been shunned by banks who fear using the facility will signal trouble to other financial institutions. This stigma is such that even as the Fed has encouraged banks to use the tool, they remain hesitant to do so in all but the most dire situations.
Banking trouble in the spring of last year was such that even as discount window borrowing jumped, the Fed nevertheless elected to provide liquidity via a new facility called the Bank Term Funding Program, which stopped lending earlier this year.
Speaking on July 10, Fed Chair Jerome Powell said that in terms of the discount window, “we know that the infrastructure is a little tired and we’re investing in that and making it more user-friendly … That’s a big, big project.”
Powell added that “we want people to be able to freely use the discount window,” but so far the Fed has “not made a lot of progress” in making it a more attractive source of funding.
(Reporting by Michael S. Derby; Editing by Paul Simao)
