Fed Contemplating New Requirements to Its Liquidity Framework for Banks

The Federal Reserve is proposing a new requirement for banks to boost their liquidity, according to Vice Chair for Supervision Michael Barr, who spoke Thursday at the 2024 US Treasury Market Conference at the New York Fed.

The new rule would compel larger banks to maintain a certain level of “readily available liquidity with a pool of reserves and pro-positioned collateral at the discount window, based on a fraction of their uninsured deposits,” Barr said. Community banks would not be covered, and the Fed would take a “tiered approach to the requirements.”

Treasuries “and the full range of assets eligible for pledging at the discount window,” he noted, might be among the collateral pre-positioned at the discount window. The requirement would complement current liquidity regulations, including those which require internal liquidity stress tests, he added.

The Fed is also trying to close vulnerabilities in interest rate management discovered during the March 2023 banking crisis, especially those “in portfolios of highly liquid securities.”

Barr stated that the central bank is investigating how a few deposit categories in the liquidity framework are currently handled.

“Observed behavior of different deposit types during times of stress suggests the need to recalibrate deposit outflow assumptions in our rules for certain types of depositors,” he said. “We are also revisiting the scope of application of our current liquidity framework for large banks.”