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Hsu insists: Big banks must meet 5-day liquidity demand

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TLDR:

In a recent speech, Acting Comptroller of the Currency Michael Hsu called for a new liquidity requirement that would require large and midsize banks to position enough collateral with the Federal Reserve’s discount window to cover five days of operations. Hsu believes this rule would address “acute” liquidity events and help banks better withstand rapid deposit runs. He also suggested that regular testing of discount window readiness be included in the rule. This proposal would be in addition to the existing liquidity coverage ratio (LCR) which requires banks to maintain enough high-quality liquid assets to cover 30 days of liquidity stress. Hsu said the current characteristics of bank runs are changing due to technological advancements, and regulators need to adapt accordingly.

Hsu’s proposal aims to improve liquidity management and bolster the system against panics. By requiring banks to position enough assets at the discount window, regulators expect banks to utilize it during times of stress to cover short-term liquidity outflows. This approach would help eliminate the negative perception of the discount window and make it a more readily available tool for banks.

In his speech, Hsu pushed back against other liquidity management provisions that have been suggested, such as adding discount window capacity to the liquidity coverage ratio. He also emphasized the need to maintain a clear distinction between being a lender of last resort and providing a bailout.

The OCC would need to go through a formal rulemaking process to enact the proposed liquidity requirement, which would include drafting a proposal and allowing for public comment. It is uncertain whether the Federal Reserve and Federal Deposit Insurance Corp. would join in implementing a liquidity requirement, but officials from both agencies have indicated that changes to liquidity requirements may be necessary.

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