In response to current banking sector turmoil, Federal Reserve Vice Chair Michael Barr has emphasised the significance of incorporating the Federal Reserve’s low cost window into banks’ liquidity threat administration methods. Speaking at a European Central Bank occasion at the moment, Barr advocated for the frequent use of this central financial institution backstop device, which he believes ought to be destigmatized amongst regulators and market observers.
During his tackle, Barr identified the shortcomings in emergency funding mechanisms that have been delivered to mild by speedy financial institution failures earlier this 12 months, together with these of Silicon Valley Bank. He acknowledged that the present liquidity rules, that are designed to cowl 30-day money outflow eventualities, is probably not enough to resist sudden financial institution runs. This has led to a reevaluation of supervisory practices round liquidity threat, with a concentrate on the liquidity protection ratio and the web steady funding ratio.
Barr additionally addressed the operational challenges banks face in rapidly changing high-quality liquid asset buffers into money. He criticized the response instances of personal funding sources, similar to Federal Home Loan Banks and personal repo lenders, which have been slower in comparison with federal amenities. The Fed’s evaluation post-crisis revealed that some banks have improved their positioning for accessing the low cost window by higher aligning their property with potential liabilities.
Although Barr conceded that these measures wouldn’t have prevented the collapse of Silicon Valley Bank or Signature Bank (OTC:), he pressured that they’re essential for managing much less extreme liquidity crises when paired with correct threat administration methods.
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