Large Bank Supervision Forum eBook

Internal Use Only

Should the FRB add term structured solutions at the Discount Window . . .

 Amid uncertainty surrounding the mission of FHLB and the scheduled expiration of the Bank Term Funding Program, The Federal Reserve Discount Window will be an essential source of contingent liquidity and stability for the industry on a go forward basis.  The Discount Window was constructed to help depository institutions manage their liquidity risks efficiently, but the lack of term options in place provides limited flexibility to the industry in doing so.  The Federal Reserve should introduce term structured products, similar to those at other borrowings facilities, to effectively execute its mission with the program. Minimally add 1 month, 3 months, 6 months and 1 year. Possibly add a 2, 3, 4, and 5 year term as well.  Must make the discount window an acceptable tool for bank liquidity by eliminating negative reputation aspect. Adding term options and a healthy marketing campaign endorsing this funding vehicle will be required.

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Internal Use Only

Should we consider the possibility that banks could offer contractual deposits, like brokered deposits . . .

 The industry learned that the liquidity risk from the optionality of nonmaturity deposits and to a lesser extent, term deposits, proved to be a detrimental to, liquidity to the failed banks in 2023.  Premature withdrawal optionality on term deposits should be eliminated to remove option risk from maturity deposits, which would provide banks more transparency around the liquidity risk of their liabilities. Banks could allow customers to choose whether or not to open an account with premature withdrawal capability or not.  Removing premature withdrawal options from term deposits, would mirror the structure of the brokered CD market.  Banks could limit this to commercial accounts only but we recommend it across the board.

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© 2023 – FinPro, Inc.