Federal Reserve Governors Bowman and Dallas Fed President Logan suggest that the Fed should evaluate the extent to which its emergency lending facilities can meet the liquidity needs of the banking system, indicating the need to reform the discount window tool.

At a two-day banking and finance conference jointly hosted by the Dallas Federal Reserve and the Atlanta Federal Reserve, Bowman said: "When it comes to the next step in liquidity reform, I think we must address the known and identified issues exposed during the 2023 spring bank crisis. This must include updates to the discount window operations and technology, and ensure payment services are available when needed."

At the same conference, Logan hinted that the Federal Reserve will evaluate the discount window tools. Logan said: "The last comprehensive review of the discount window was more than 20 years ago. By studying the methods of discount window loans under the current environment, combined with recent experience, we can ensure that the discount window will continue to facilitate liquidity in the future."

Bowman pointed out that some banks have encountered friction when using the discount window, which may exacerbate the pressure they face. She said that reforms are needed to modernize discount window loans and payment services, such as updating technology used by banks to apply for loans.

At the same time, Logan once again called on all banks to sign up for the Federal Reserve's emergency loan arrangements and noted that institutions need to continue testing their operational readiness. Policymakers argue that by regularly testing their ability to obtain and use loans in times of stress, they can prevent bigger problems such as regional bank failures last year.

Logan said:"Every bank in the United States should have a comprehensive discount window as part of its liquidity toolkit." She noted that more than 5,000 deposit institutions have completed the necessary documents to sign the discount window admission agreement, and there is now $3 trillion in collateral pledged, an increase of $1 trillion from last year.

It is worth mentioning that although the discount window is a long-term tool for the Federal Reserve to stabilize the financial system in times of turmoil, banks often shy away from it because they are worried that using the tool will send a troubling signal to other financial institutions. This sense of shame is so strong that even if the Fed encourages banks to use the tool, they still hesitate in the most critical situations.

Last week, Federal Reserve Chairman Powell said in a House speech that, in terms of the discount window, "We know that there is some aging infrastructure; we are investing in that to make it more user-friendly...This is a very big project." Powell added,"Hoping that people will be able to use the discount window freely," but so far, the Federal Reserve has"not made much progress in making it a more attractive source of funding."

Deposit insurance

Logan also stated that the current federal deposit insurance limit may be too low, especially after last year's turbulence in the US banking industry. She said that since the US Congress raised the federal deposit insurance limit to $0.25 million in 2008, the US economy has grown significantly. If the federal deposit insurance limit is raised in sync with nominal GDP, today's limit would be close to $0.5 million. $SVB Financial (SIVBQ.US)$And.$Signature Bank (SBNY.US)$The need to protect depositors after the failure of IndyMac Bank also indicates that the current federal deposit insurance limit is too low.

Logan said:"This was clearly the right decision to protect the economy and the financial system after the banks failed. But the aftermath is providing insurance to depositors who were not supposed to receive insurance, and these depositors' banks are not subject to the oversight of systemically important regulators, which to me is an indication that the insurance limit was too low from the beginning." She added that Congress will ultimately make the decision on this issue.

However, Logan also said that raising the federal deposit insurance limit could also hinder the use of reciprocal deposit networks. It is reported that reciprocal deposit networks allow banks to exchange deposits that exceed the limit in order to provide more insurance to depositors.

In terms of regulation, Bowman said that the failures of Silicon Valley Bank, Signature Bank, and First Republic Bank are often viewed as the basis for "many issues on the current regulatory agenda." But she pointed out that many of the risks discovered during last year's banking crisis were not new. Bowman said:"Addressing concentration risk, interest rate risk, and liquidity risk have long been key factors in effective regulatory bank review.""It is well known that these risks can create significant gaps that, if mismanaged for the long term, may be fatal to individual institutions."

In terms of regulation, Bowman stated that the failures of Silicon Valley Bank, Signature Bank, and$First Republic Bank (FRCB.US)$First Republic Bank were often seen as the basis for many issues on the current regulatory agenda. But she pointed out that many of the risks discovered during the banking crisis last year were not new. Bowman said: "Addressing concentration risk, interest rate risk, and liquidity risk have long been key factors in effective regulatory bank reviews." "It is well known that these risks can cause significant vulnerabilities and, if mismanaged over the long term, may be fatal to individual institutions."

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