According to Yahoo News, the Federal Reserve's top bank watchdog is urging lenders to feel more at ease using the central bank's discount window. Michael Barr, the Fed's vice chair for supervision, promoted the backstop as a crucial instrument for financial stability and monetary policy during a European Central Bank event on Friday. He emphasized that banks should utilize the window during both good and bad times.
Barr stated that the ability to access funding at a predictable rate through the discount window should be an essential component of banks' liquidity risk management plans under various scenarios. The issue of where banks seek funding during stressful times has become a topic of discussion in the US following the failure of several midsize lenders earlier this year. A recent government report suggested that Federal Home Loan Banks, another funding source, should direct lenders to the Fed during times of extreme stress.
Barr also highlighted the importance of lenders having multiple options for accessing liquidity, with discount window borrowing being a significant part of the mix. He acknowledged that some lenders are worried about negative feedback from regulators if they only borrow from the discount window because the loans are affordable and convenient. To address this concern, Barr said that the Federal Reserve has been emphasizing to banks, supervisors, analysts, rating agencies, other market observers, and the public that using the discount window should not be viewed negatively. He reiterated that banks must be prepared and willing to use the discount window in both good and bad times.