Bloomberg News
Washington regulators are encouraging banks and credit unions to test their ability to borrow from emergency lending facilities regularly to ensure they are able to access liquidity in a pinch.
The Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and National Credit Union Administration issued guidance Friday on how depositories should “regularly evaluate and update their contingency funding plans.”
Both Silicon Valley Bank and Signature Bank struggled to use the Fed’s discount window in March amid significant upticks in depositors’ withdrawal requests. Regulators have concluded that better preparation likely would not have saved the banks from failure, given the size of their respective runs, but their guidance notes that the episode “underscored the importance of liquidity risk management and contingency funding planning.”
Friday’s guidance is the first formal recommendation on last-resort borrowing since the bank failures, but Fed officials have called on banks to be more proactive in their discount window preparations in recent months. On Wednesday, Fed Chair Jerome Powell discussed the topic during his post-Federal Open Market Committee meeting, noting that the process can be “clunkier” than banks anticipate.
“Banks are now working to see that they are ready to use the discount window, and we are strongly encouraging them to do that — banks broadly,” Powell said, adding that depositories should be “much more ready” to access liquidity than they have been.
The guidance notes that banks should familiarize themselves with the operational steps required to borrow from the discount window as well as the NCUA’s credit liquidity facility. It also calls for reviewing and revising contingency funding plans “periodically and frequently.”
The agencies encouraged banks to have renewed contacts with emergency lenders, including the Fed and the Federal Home Loan banks, the latter of which is often seen as a more preferable source of emergency funds.
Advances from Home Loan banks carry less of a stigma than discount window loans, but they can be harder for banks to access on short notice. Home Loan banks impose caps on how many advances member banks can take out and they accept different types of collateral. Officials at the Federal Reserve Bank of New York said a misunderstanding of the differences between the two facilities contributed to Signature’s difficulties.
The guidance also encourages depositories to “pre-pledge” collateral to the discount window, if they are relying on it as a source of emergency liquidity. The process involves drawing up contracts for assets to be transferred to the facility ahead of time so the transaction can be executed more quickly.
“Depository institutions that include the discount window as part of their contingency funding plan should also consider conducting small value transactions at regular intervals to ensure familiarity with discount window operations,” the document notes.
Regulators also noted that credit unions should be aware of the distinct features of the Central Liquidity Facility, which is housed within the NCUA but has shared ownership between member institutions and the government. Credit unions with $250 billion of assets or more must have access to at least one federally backed liquidity source — either the Central Liquidity Facility or the discount window.
Source: nationalmortgagenews.com