The Federal Reserve is considering enhancements to its discount window, a crucial source of contingency funding. The Bank Policy Institute (BPI) has suggested that these improvements should include modernizing operations, increasing transparency, and encouraging banks to use the window in regular circumstances. BPI expressed support for the Fed's initiative to gather public input on this matter.

Brett Waxman, BPI's Senior Vice President and Senior Associate General Counsel, stated: “We welcome the Fed’s efforts to make the discount window a more effective tool to support financial stability. The banking turmoil of 2023 made it clear that ensuring the window is ready and efficient to use is an urgent priority. It’s critical that new improvements cement the window as an ordinary liquidity tool rather than a disparaged and disused emergency lever. Regulators should also consider changes to the window not in isolation but in the context of liquidity requirements.”

The Federal Reserve is currently seeking feedback on improving the operational effectiveness of the discount window. Historically, its infrastructure has been considered outdated, with a stigma attached that discourages banks from using it during liquidity crises, such as those experienced in 2023.

To enhance the discount window, BPI recommends focusing on four key areas: harmonizing practices across Reserve Banks, improving transparency regarding eligible collateral and its valuation, modernizing operational processes, and promoting bank readiness to borrow.

These potential reforms are part of a broader reevaluation of liquidity frameworks by banking agencies. Consideration should be given to reducing associated stigma and incorporating discount window availability into liquidity requirements like stress tests.

The Bank Policy Institute is a nonpartisan organization representing various banks operating in the United States. It engages in research and advocacy related to regulatory and monetary policy issues.