MNI: Fed Facilities Support Treasury Market Resilience - Barr
The Federal Reserve's top banking regulator on Thursday urged lenders to incorporate usage of the discount window and the standing repo facility into their contingency funding plans and internal liquidity stress tests, saying greater use of these facilities supports both the implementation of monetary policy and financial stability.
Banks of all sizes have improved their readiness to tap the discount window since the regional bank crisis of 2023 and more banks have established access to the standing repo facility, Fed Vice Chair for Supervision Michael Bar said.
"We see it as acceptable and beneficial for firms to incorporate our facilities to meet liquidity needs in both planning and practice," he said in remarks prepared for a Treasury Market conference hosted by the New York Fed. (See MNI INTERVIEW: Fed Should Mandate Readiness Of Discount Window)
"Reserves and certain high-quality liquid assets (HQLA), such as Treasury securities, are equivalent in terms of being treated as the highest quality of liquid assets. This feature is important because, while it allows firms to manage their liquidity buffers more flexibly, it also allows for greater flexibility in our monetary policy implementation and it supports market functioning."
"When firms understand that they will not be fully constrained by the capacity of private markets or their individual credit lines to monetize HQLA immediately in stress, they can reduce their demand for reserves in favor of Treasury securities, all else being equal, for their stress planning purposes," he said.
Demand for Treasury reserves has been rising over the years, driving the Fed to maintain a much larger balance sheet than before.