By Pete Schroeder
WASHINGTON, March 3 (Reuters) – The U.S. Treasury Department and bank regulators are eyeing a comprehensive review of bank liquidity rules, arguing existing rules are ineffective and impede lending.
Senior Treasury and Federal Reserve officials discussed changes to the rules on Tuesday, saying revised requirements could ensure banks utilize tools meant to keep them afloat during times of stress, while minimizing the amount of funds they must set aside. The remarks indicate that the Trump administration is likely to tackle liquidity rules soon, the latest step in a comprehensive overhaul of existing bank requirements.
In remarks prepared for Treasury Secretary Scott Bessent, he cautioned that the current framework “has excessively and unnecessarily limited banks’ ability to do what they are supposed to do—lend.” The speech was delivered at a regulatory roundtable by Jonathan McKernan, the Treasury’s under secretary for domestic finance.
Specifically, Bessent floated giving banks credit on their liquidity requirements when they preposition collateral at the Fed’s discount window, which is a tool long meant to serve as a source of quick liquidity for banks but one the industry has avoided due to fears of signaling weakness. Acknowledging collateral from banks at the discount window as potential borrowing capacity could reduce that stigma, and capping that recognition could ensure banks still take sufficient steps on their own balance sheet to withstand potential runs, he added.
He went on to suggest the cap could be adjusted during times of stress.
The abrupt collapse of Silicon Valley Bank in 2023, where the bank saw a massive outflow of deposits in just a few days, has refined regulators’ focus on tweaking liquidity rules, which are meant to ensure that banks have ready access to accessible funds during times of stress. Under President Biden, regulators eyed changes that ultimately failed to materialize.
The banking industry is keen for reforms. In a statement, the Bank Policy Institute, which represents larger firms, said, “Proper calibration of liquidity regulations will allow banks to deploy their excess liquidity to better support economic growth rather than government growth.”
Speaking earlier Tuesday, Fed Vice Chair for Supervision Michelle Bowman said the discount window needed “fundamental reform,” noting that it is applied inconsistently across the nation’s 12 Federal Reserve banks, which each develop their own rules and processes for window access.
(Reporting by Pete Schroeder; Editing by Chizu Nomiyama)
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