Banks should increase use of 'discount window' to prevent crises -expert group

First Republic Bank

09/01/2024 16:30

Jan 9 (Reuters) - 
    Commercial banks should prepare to borrow more readily from
central banks to limit contagion in times of stress and
discourage runs by depositors, an expert regulatory panel said
on Tuesday in a report about last year's banking crisis. 
  
    The Group of 30 (G30), an international forum of central
bankers, economists and private financiers, also said improving
accounting standards, more comprehensive stress testing and
better supervision, would help prevent future bank failures.
    Last year's collapses of Silicon Valley Bank, Signature Bank
 SBNY.PK , First Republic Bank  FRCB.PK  and Credit Suisse
constituted the worst financial crisis since 2007-2009. The U.S.
banks all collapsed following depositor runs.
    However, reforms proposed so far have under-emphasized the
importance of "lender of last resort" or central bank "discount
window" lending in limiting contagion, according to the report,
which was chaired by former New York Federal Reserve Bank
President William Dudley.
        Borrowing from central banks continues to carry a stigma
as a sign of weakness and can require collateral that banks
don't immediately have handy, meaning the system goes unused,
the report said. 
    Reuters reported last year
     that many small banks are not set up to borrow from the
Fed's discount window.
  
    Fixing central bank lending systems is "the most important,
most feasible and lowest-cost reform" to contain panic and 
discourage depositor runs, the group said. Banks should have
enough collateral on hand to cover "all runnable liabilities"
via discount window borrowing, it added.
    The position echoed guidance issued last year by U.S.
regulators.
    The report comes as the U.S. banking industry battles
proposed reforms to capital regulations which officials say
should also help address some of the concerns from last year's
bank failures. U.S. regulators have also intensified scrutiny 
of risk management and said they will modify stress tests.
    Meanwhile, Swiss authorities are seeking greater regulatory
muscle, including the power to levy fines, and have considered
anti-run measures.

 (Reporting by Douglas Gillison; editing by Michelle Price and
Nick Zieminski)
 ((douglas.gillison@thomsonreuters.com;))