Discount Window Reform Bill Introduced as Fed Works on its Own Overhaul

• Federal Reserve efforts to overhaul a key emergency lending facility historically viewed with anxiety by banks are now being joined by potential congressional action. On Friday, Democratic Senator Mark Warner introduced legislation, to overhaul the Fed's discount window, a long-running tool that provides fast, collateralized loans to deposit-taking banks.
• Despite the Fed working to make sure banks are ready and willing to use the discount window, banks have long shunned it, fearing that using it will send a signal of distress to their peers. That long-standing stigma stood out in March 2023 when several banks ran into trouble and spurred fears about the overall state of the banking system.
• Since then, Fed officials have been seeking to make sure banks are prepared to use the discount window and have signalled some confidence their efforts are working. Warner's bill could bolster that as it would mandate all, but the smallest banks, to test their discount window access and require regulators to reflect banks' ability to use the facility when evaluating their liquidity.
• The discount window "has deficiencies that have led to severe stigma, increasing the risk of banking panics and deposit runs," former New York Fed President William Dudley said in Warner's statement announcing the bill. "This bill will provide a good basis for regulators to implement operational improvements and reduce frictions that hinder the effectiveness of [the] discount window."
• Earlier this month, Dallas Fed President Lorie Logan said more than 5,000 deposit-taking banks did the paperwork needed to access the discount window, with banks having pledged $3 trillion in collateral for potential loans, up from $1 trillion last year.

 (Source: Reuters)