By Hannah Lang
(Reuters) – U.S. banks should incorporate the Federal Reserve’s emergency lending facility known as the “discount window” as part of their contingency funding plans, federal banking regulators said in updated guidance on Friday.
The discount window, a key Fed facility long associated with providing emergency loans to banks, is “an important tool” banks can use to manage liquidity risk, bank regulators including the Federal Reserve and Federal Deposit Insurance Corp said in an updated interagency policy statement.
The bank runs earlier this year that forced regulators to shut down Silicon Valley Bank and Signature Bank in mid-March “underscored the importance of liquidity risk management and contingency funding planning,” the agencies said.
The updated guidance comes after Dallas Fed President Lorie Logan said in May that banks should be prepared to borrow regularly from the Fed’s discount window, particularly after the March bank failures demonstrated the importance of effective liquidity risk management.
The bank regulators also said that financial institutions should establish and maintain operational readiness to use the discount window, including conducting periodic small value transactions.
Firms should also ensure that they are familiar with the pledging process for different types of collateral and should even consider pre-pledging collateral in case a need for liquidity were to arise quickly, the agencies said.
(Reporting by Hannah Lang in Washington; Editing by Dan Burns and Marguerita Choy)
