Last spring, three of the four largest bank failures in U.S. history occurred, raising questions again about bank runs and liquidity.
Travis Hill, vice chairman of the Federal Deposit Insurance Corporation, shared his thoughts on how regulators and banks can better manage liquidity stresses, including regulating brokered deposits and how regulators should develop their final Basel III redraft. He spoke Wednesday at the American Enterprise Institute.
Here are five takeaways from his speech.
1. Regulators need to figure out how to remove the stigma from discount windows.
Hill said banks must be able and willing to use available lending facilities. The less a bank uses the discount window, the more hesitant regulators will be to allow them to treat it as part of their contingency plans.
“The Fed has been working for many years to address a problem that has existed for almost its entire history: stigma. I believe that, at least for the large banks, stigma will continue to be a problem as long as banks do not borrow substantially through the discount window. and “The market can tell when stressed banks are going to be forced to borrow,” Hill said.
“The fundamental challenge is to encourage banks to use the discount window so that they incur less damage when they really need to, but not so attractive that the central bank becomes the everyday source of liquidity for the whole industry,” he said.
2. Better access to real-time data could help manage liquidity stress.
The FDIC launched a mechanism in 2020 to develop technology to give regulators access to real-time deposit flow data, but FDIC Chairman Martin Grunberg halted it. The Federal Reserve also does not have access to real-time deposit flow data.
“It would be extremely helpful for the Fed to provide this data to key decision makers in real time, along with the ability to analyze it rapidly,” Hill said. “Among other benefits, better visibility into deposit movements across the system in real time could greatly improve the ability to monitor for runs and contagion, and potentially reduce the risk of unnecessarily invoking the systemic risk exception (and vice versa).”
3. Regulation on brokered deposits needs to be updated.
Brokered deposits are sometimes considered “hot money” because they are less “fixed” than typical retail deposits, as they move from bank to bank in search of higher yields. The framework for these deposits has been in place since 1989, and with new brokered deposit regimes emerging in recent years, it’s time for an update, Hill said.
“The various types of deposits currently classified as ‘brokered deposits’ have in some ways opposing characteristics. Some brokered deposits raise concerns about their safety and soundness because they may be volatile, unstable or subject to withdrawal if a bank is exposed to disruption or bad publicity,” Hill said.
“Traditional brokered deposits, on the other hand, raise the opposite concern: the deposits have no franchise value and are very stable, since depositors have no relationship with the bank, they offer high interest rates, are fully insured, typically cannot withdraw before maturity and are therefore typically indifferent to the bank’s situation,” he added.
4. A final restatement of last year’s Basel III is needed, and a partial restatement may not be enough.
Fed Chairman Jerome Powell said earlier this month that it was essential to hear public feedback on proposed changes to a sweeping overhaul of how big banks assess risk and how much capital they are required to hold.
Hill spoke in support of a full resubmission.
“While some changes are relatively simple and may, in isolation, benefit less from additional feedback, all within the frameworks are interrelated,” Hill said. “For example, commenters may react differently to a particular change in the operational risk framework if they knew the agencies intended to adopt other changes to the credit risk framework (and vice versa), because both frameworks affect capital charges associated with the same exposures.”
5. The Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency must agree on a final re-proposal of Basel III.
Chairman Powell said this month that the Fed was working to get the FDIC and OCC to approve the revised proposal, and Chairman Hill indicated he agreed.
“Reproposing only one agency and then expecting the three agencies to jointly issue a final rule in the future is unprecedented, will cause confusion, and will raise many practical and legal questions,” Hill said.
