NEW YORK — Acting Comptroller of the Currency
In a speech delivered at an event at Columbia University Law School, Hsu called for a rule that would require large and midsize banks to position enough assets at the Federal Reserve's last resort lending facility, the discount window, to withstand "ultra short term, acute outflows."
Along with bolstering individual banks and the system as a whole against panics, Hsu said the mandate could change the
"This would make clear that regulators expect banks in stress to utilize the discount window to help cover short term liquidity outflows when needed," he said. "This regulatory expectation could help de-stigmatize discount window usage."
The requirement would be in addition to the liquidity coverage ratio, or LCR, which compels banks of a certain size to maintain enough high-quality liquid assets to cover 30 days of significant liquidity stress.
Hsu said the change "warrants serious consideration," in light of not only
"The characteristics of bank runs are changing. Banks and regulators need to adapt accordingly," he said. "As the speed of banking and finance accelerates, so too does the need for better brakes to enable a safe and sound system."
Hsu said a five-day liquidity requirement would merely codify an approach that many banks already take voluntarily, noting that
During the speech — delivered to a lecture hall of roughly 40 students, industry participants and reporters — Hsu pushed back against other liquidity management provisions that have been floated during the past year.
Specifically, he dismissed the notion of adjusting the LCR by adding discount window capacity to the numerator of the formula and expanding asset eligibility beyond the current high-quality standards, calling the idea "dangerous."
Hsu also noted that any adjustments to discount window policies should try to maintain the facility's status as a backstop and avoid turning it into a crutch.
"The line between being a lender of last resort and providing a bailout can be a fine one, especially in stress," he said.
Hsu said the short-term nature of his proposal would not only engender trust from all involved parties, but also protect against abuse.
Discount window issues arose in the failures of Silicon Valley Bank and Signature Bank last year, with both institutions struggling to pledge assets to the facility in a timely fashion amid large bank runs. Since then, officials from the Fed, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency have stressed the importance of readiness. In speeches and formal guidance, they have urged banks to be prepared to use the discount window at the drop of a hat.
Hsu said this type of supervisory approach to liquidity management is important, as it allows agencies and their examiners to deal with the specific needs of individual banks. But, he said, a new rule would be called for in this situation to establish clear baseline expectations around discount window readiness.
To enact such a requirement, the OCC would have to go through a formal rulemaking process, which includes drafting a proposal and opening it up to public comment. It is unclear whether the Fed and FDIC would join in such an effort, though officials from both agencies have suggested that changes to the liquidity requirements could be in order.
Hsu also said that the rule should not be viewed as an indictment of the LCR, which he said has been an "underappreciated success story," since its creation as part of the Basel III accords outlined after the 2008 financial crisis. But, he noted, the accelerated speed of the modern bank runs has unveiled some of LCR's limitations.
"If you have sufficient liquidity, as measured in the LCR, for 30 days, that doesn't help if you can't get to the weekend," he said during a question and answer session after his speech. "You have to be able to get to the weekend, and that means being able to convert whatever you have into cash, and the most reliable way to do that is through the discount window."
