Federal Reserve Chairman Jerome Powell's assertion that banks employing the discount window could be standard practice.
Federal Reserve Proposes Enhanced Liquidity Regulations for Large Banks
The Federal Reserve is proposing a regulatory change aimed at bolstering market resilience by tying enhanced liquidity requirements for large banks to risk-sensitive metrics, such as uninsured deposits. This shift marks a move away from fixed percentage buffers towards measures that more closely reflect each bank's risk profile and systemic importance.
Under the proposed changes, the Supplementary Leverage Ratio (SLR) for U.S. global systemically important banks (GSIBs) would be recalibrated. Instead of a fixed 2% buffer above a 3% base requirement, the buffer would be tied to 50% of the bank’s GSIB Method 1 surcharge. This adjustment would better match minimum liquidity requirements to each bank’s systemic risk.
For insured depository institutions owned by GSIBs, the requirement would similarly be linked to 50% of the parent bank’s GSIB Method 1 surcharge, rather than a flat 3% buffer. Other large banks not classified as GSIBs would maintain the current 3% SLR minimum without change.
These changes are part of a broader effort to rethink capital and liquidity requirements post-Basel III and aim to unlock more balance sheet capacity for banks while managing systemic risk prudently. The Federal Reserve is engaging in a data-driven, consultative approach with stakeholders and is seeking public comments through August 2025 on these proposals.
The Fed is also working to improve the functionality of the discount window to address concerns raised by Fed Governor Michelle Bowman, who mentioned issues some banks have faced while accessing the tool. More than $1 trillion in additional collateral has been pledged to the discount window, and more banks have access to standing repo facilities. The Fed has launched an online portal, Discount Window Direct, for firms to request and prepay discount window loans in a more streamlined way.
In addition, Sen. Mark Warner introduced legislation in July requiring banks to engage in periodic test borrowing at the central bank's discount window. The legislation aims to ensure banks are prepared to access the discount window during times of stress.
The Federal Reserve Vice Chair for Supervision, Michael Barr, emphasized the importance of the discount window and the need to prioritize areas for improvement in the discount window's operations. The Fed is considering a partial limit on reliance on held-to-maturity assets in larger banks' liquidity buffers and potentially requiring larger banks to maintain minimum readily available liquidity tied to their uninsured deposits.
The enhancements to the liquidity regulations are intended to help strengthen firms' ability to manage liquidity shocks, thereby promoting financial stability and fostering confidence in the banking sector. The proposed changes will complement existing liquidity regulations like internal liquidity stress tests and the liquidity coverage ratio.
[1] Federal Reserve press release, “Federal Reserve Proposes Revisions to Leverage Ratio Buffers and Systemic Risk Surcharges,” June 30, 2023.
[2] Federal Register notice, “Proposed rule: Revisions to Leverage Ratio Buffers and Systemic Risk Surcharges,” July 15, 2023.
- The proposed changes in the liquidity regulations by the Federal Reserve could have significant implications for the business sector, as they aim to closely link liquidity requirements to each bank's risk profile and systemic importance in the finance industry.
- The ongoing efforts by the Federal Reserve, such as the proposed adjustments to the Supplementary Leverage Ratio (SLR) and improvements in the discount window's functionality, are part of broader policy decisions influenced by both politics and general-news factors, including the need to manage systemic risk and promote financial stability.
