Former Fed official: Liquidity adjustments needed to prevent next SVB

Former Fed President Daniel Tarullo is one of several authors of a paper proposing new liquidity requirements for large banks.

Michael Nagel/Bloomberg

Revise Current standards Is key to preventing future bank runs Ranked first among Silicon Valley banks last yearAccording to a paper by a former Fed official.

Former Fed governors Dan Tarullo and Jeremy Stein are co-authors of a paper published late Wednesday that examines last year’s bank failures and recent decades. The evolution of banking.

In it, they called for lowering the asset threshold for banks to implement full liquidity coverage ratios from $250 billion to $100 billion, which requires banks to maintain enough high-quality liquid assets to withstand large deposit outflows for 30 days. Says banks should be required to have sufficient assets as collateral for the Fed’s lending facility of last resort to offset uninsured deposits.

“The concept is that banks’ liquidity positions will improve significantly precisely because it can access the discount window at any time, preposition collateral, and therefore the Fed will be able to provide liquidity to banks immediately,” Tarullo said. He served as the Fed’s top regulatory official after the subprime mortgage crisis and during the implementation of the Dodd-Frank Act.

The recommendation comes as Washington regulators prepare to roll out their own reforms sometime this year.

Fed Chairman Jerome Powell and Vice Chairman of Oversight Michael Barr Says crisis reforms are underway, while Acting Comptroller of the Currency Michael Hsu has proposed a set of potential changes: Mandating asset pre-allocation at the Fed’s discount window and imposing five delayed liquidity requirements on certain banks.

The new paper, “The Evolution of Banking in the 21st Century: Evidence and Regulatory Implications,” explores the impact of two sets of potential reforms: extending insurance coverage to all deposits in the banking system and requiring banks to have full liquidity Coverage Capabilities This paper was written for the Brookings Paper on Economic Activity, a biannual conference sponsored by the Brookings Institution, a Washington-based think tank.

In the paper, the Harvard team, which also included Samuel G. Hansen, Victoria Ivashna, Laura Nikolai, and Adi Sundram, noted that deposit insurance In addition to being politically unfeasible, widespread expansion would create a “moral hazard” incentive for troubled banks to take greater risks.

However, the problem is compounded as banks’ deposit bases grow faster than their ability to channel funds into new loans, the report noted. Stein said this was driven by a variety of factors, including the Fed’s own balance sheet expansion, savers’ preference for higher balances, and greater competition from non-bank lenders.

“It’s not that people have great loan opportunities and raise deposits for them,” Stan said. “On the contrary, they have a huge influx of deposits, and if you have too many deposits, it exceeds your natural loan opportunities and leaves you with The bottom is over.” Securities prices rose…mainly long-term Treasury bonds and mortgages. “

Researchers noted that a challenge in scaling up liquidity needs is that banks tend to accumulate securities rather than originate loans.

Tarullo said the solution lies in handling high-quality liquid assets (HQLA) within the liquidity coverage ratio (LCR) and the collateral that banks can pledge to the discount window. He urged regulators to “coordinate the treatment of collateral” for LCR HQLA purposes and the funding needed to support uninsured deposits. “

The paper does not require a dollar-for-dollar matching of pre-allocated assets to deposits in excess of the $250,000 deposit insurance limit during the Fed’s discount window. Tarullo said he and his co-authors did not propose a specific ratio because they believed there was a lack of necessary information about deposits in the banking system to make such a decision.

However, he noted that the proposed framework could go a long way toward reducing the problemtigma related to discount window lendingThis factor has long prevented banks from turning to lending facilities until it was too late, regulatory officials and finance academics say. He said the framework would complement current efforts by Fed officials to encourage discount window preparations.

“My expectation is [our proposal] It will almost inevitably reduce the stigma associated with it, precisely because [the discount window is] “It’s built into the regulatory system, not just as a lender of last resort,” Tarullo said. “I don’t know if that gets you all the way, but I think combined with the board’s efforts to persuade governors, what we’re talking about should make it We are moving further in this direction.”

Stein added that the discount window did not need to solve all the problems faced by troubled banks to be an effective tool.

“I don’t think we are necessarily under the illusion that all problems can be solved through discount window lending,” he said. “But even for a bank that is going to fail eventually, that should happen in a somewhat orderly way.” “Fashionably, the discount window buys you a week or ten days… To allow failure to happen in a more orderly fashion, maybe you can find someone to sell the bank without having to invoke systemic risk exemptions. Only This is a virtue.”

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