Bill Nelson, Chief Economist at the Bank Policy Institute (BPI), is set to testify at a House Financial Services Subcommittee hearing focused on the Federal Reserve's discount window. The hearing, titled "Lender of Last Resort: Issues with the Fed Discount Window and Emergency Lending," will address the role of the discount window in maintaining banking system liquidity.

Nelson's testimony highlights the need to view the discount window as a regular tool rather than just an emergency funding source. He points out that its dual function as both a monetary policy tool and a contingency funding source has led to a longstanding stigma. This stigma was exacerbated during responses to the Global Financial Crisis.

"Consequently, one of the Fed’s most important monetary policy and financial stability tools doesn’t work well," Nelson stated. He emphasized that banks may not borrow even when necessary due to this stigma, affecting their ability to manage liquidity strains effectively.

Nelson also addressed how current liquidity requirements fail to recognize borrowing from the discount window as a valid source of bank liquidity. This oversight contradicts reality, where banks prepared to borrow are more liquid than those that are not.

Recent discussions among policymakers have considered changes to liquidity rules that could acknowledge banks' readiness to use the discount window. Such changes could lead banks to allocate more resources toward lending rather than holding government securities or deposits at the Fed.

Nelson suggested several recommendations for policymakers, including selling committed liquidity facilities (CLFs) as backup funding sources, reducing stigma through education, and eliminating public identification requirements for borrowers. He also advocated for examining obstacles preventing banks from pledging collateral at the discount window and proposing rule changes with stakeholder input.

The BPI represents leading banks in the United States and aims to promote financial innovation and economic growth through research and advocacy.