ABA Statement for the Record for the hearing, Lender of Last Resort: Issues with the Fed Discount Window and Emergency Lending

The American Bankers Association (ABA) appreciates the opportunity to provide a Statement for the Record for this hearing, Lender of Last Resort: Issues with the Fed Discount Window and Emergency Lending. The U.S. banking system is wider and deeper than in any other market in the world. The industry’s strength is in its numbers and diversity of bank size and business model. With over 4,600 banks, including 3,616 community banks under $1 billion in assets, the U.S. banking system remains strong, and employs more than 2 million professionals, safeguards $18.6 trillion in deposits, and extends $12.3 trillion in loans. ABA and its members understand and acknowledge that robust liquidity risk measurement, monitoring, and management are critical for making both individual banks and the U.S. financial system resilient. The discount window, established to help banks weather a liquidity storm, is an essential component of liquidity risk management. For a variety of reasons, however, many banks tend to turn to other sources of funding during times of stress. 

To make the discount window a preferred source of funding during periods of stress, it needs to meet the needs of modern banking for banks of all sizes. We thank the committee for holding this hearing to examine whether the discount window is serving its purpose effectively. We make several recommendations below that would help reposition the discount window as a useable and preferable source of contingent liquidity for all banks. The recommendations provided here are intended to broaden the discussion rather than offer an exhaustive list of changes. There are many complex and intertwined policy questions that need to be explored when considering the discount window, including if usage should be limited to emergencies, appropriate levels of usage and who is charged with monitoring levels of usage for individual banks. Additionally, efforts to improve the discount window should not undermine or disadvantage other critical sources of liquidity, such as the Federal Home Loan Bank system (FHLB), or lock-up high-quality collateral at the Federal Reserve. The current period of calm is an ideal time to consider these issues.

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