WASHINGTON — U.S. Sen. Mark R. Warner (D-VA), a member of the Senate Committee on Banking, Housing, and Urban Affairs, introduced the Discount Window Enhancement Act of 2024, legislation to improve the effectiveness of the Federal Reserve Discount Window, a liquidity tool that provides short-term loans to depository institutions, such as commercial and community banks in order to help reduce the fallout of bank failures fueled by panic-induced bank runs.   

In the wake of multiple bank failures in 2023, including the collapse of Silicon Valley Bank, Sen. Warner voiced the need for legislation to improve the function of the Fed’s Discount Window.

“The failures of Silicon Valley Bank and Signature Bank last year highlighted the urgent need to reform the Federal Reserve’s discount window for the 21^st century economy, where bank runs can occur over hours, rather than days. My legislation will implement key reforms to make sure that banks can actually use the discount window, reduce the unnecessary stigma associated with that use, and improve the window’s operations to meet the challenges of the digital age. We need to modernize the window and return this important liquidity tool to its intended role,” said Sen. Warner.

The Discount Window Enhancement Act of 2024 will:

• Mandate Testing of the Discount Window: Mandates that eligible depository institutions operating in the United States engage in test borrowing at the Federal Reserve’s Discount Window:
  • Large Institutions (> $100 Billion): Quarterly.
  • Smaller and Larger Institutions ($10 Billion – $100 Billion): Semi-annual.
  • Small Institutions (Under $10 Billion): Not in scope.
• Require Regulators to Reflect Banks’ Ability to Use the Discount Window in Liquidity Evaluations: Regulators must “give credit” in their evaluations of bank liquidity preparedness to depositories that can use the discount window successfully – “positive consideration” must be given to successful testing and pre-pledged collateral;
• Require Financial Institution Risk Committees or Equivalent to Review and Approve Liquidity Contingency Plans: Depositories’ liquidity contingency plans are to include detailed policies and procedures for seeking advances and be submitted to Federal Reserve Board, Regional Federal Reserve Bank of membership, and primary supervisor;
• Require the Federal Reserve Board to Modernize Discount Window Operations;
• Require the Federal Reserve System to Simplify and Harmonize Collateral Processes with Federal Home Loan Bank System: The Federal Reserve Board must work with the FHFA and the FHLB system to simplify and harmonize policies and procedures for pledging and transferring collateral among FHLBs and Federal Reserve Banks.
• Require Review of Weekly Federal Reserve Balance Sheet Reporting: The Federal Reserve Board must comprehensively review the weekly reporting of its balance sheet activities, and consider changes to avoid market distortions that could inadvertently place individual financial institutions at a disadvantage.
• Require Federal Reserve Study and Report to Congress on Discount Window Stigma: Requires the Federal Reserve Board to conduct a study and submit a report to Congress about additional measures that could be taken to reduce discount window stigma and improve the process for obtaining advances on behalf of depository institutions.

Sen. Warner has also led efforts to hold those responsible for bank failures accountable. In the aftermath of the Silicon Valley Bank collapse, Sen. Warner cosponsored the DEPOSIT Act, the Bank Management Accountability Act, and the Failed Bank Executives Clawback Act, efforts to ensure that bank executives do not profit in the wake of bank failures.

“The Federal Reserve Discount Window is a critical tool that gives financial institutions of all sizes access to liquidity and prevents panic in the broader financial system. Stigma associated with accessing the window and some legacy operational issues have limited the power of this tool and forced the Fed to take dramatic steps to meet recent needs. This legislation would help modernize the window to ensure immediate access by all eligible institutions in today’s lightning-fast financial system,” said Betsy Duke, Former Federal Reserve Board Governor.

“As evident from events in March 2023, it is clear that the current discount window mechanism at the Federal Reserve has deficiencies that have led to severe stigma, increasing the risk of banking panics and deposit runs. This bill will provide a good basis for regulators to implement operational improvements and reduce frictions that hinder the effectiveness of discount window,” said William C. Dudley, Former President of the Federal Reserve Bank of New York.

“Senator Warner and other supporters of this bill should be commended. De-stigmatizing the Fed’s Discount Window so that it can be a more effective liquidity tool for banks is a major step forward. This bill is thoughtful and important, and one that makes U.S. banking safer and sounder,” said Eugene A. Ludwig, Former U.S. Comptroller of the Currency.

“We thank Senator Warner for introducing this bill that will ensure banks are operationally ready to borrow from the discount window to meet liquidity needs while also reflecting that readiness in corresponding liquidity regulations and requirements.  This is a sensible piece of legislation that seeks to actually respond to the regional banking crisis of March 2023 and help make our financial system work as it is intended,” said Greg Baer, President and CEO of the Bank Policy Institute.

“The 2023 banking crisis and the 2020 COVID crisis each revealed vulnerabilities in the current design of the discount window. The events of March 2023 in particular showed that bank runs can occur faster than they did in the past. To illustrate this point: SVB experienced a total outflow of 25% of deposits in one day. Given this, what is needed is an operational system that allows the transfer of collateral and funds at the push of a button.  At the same time, it is also imperative that the Federal Reserve maintain its independence as a liquidity provider to banks, given its clear mandate under Section 10B to act independently. This bill is a foundation in which regulators can build off of to bring the discount window into the 21st century,” said Hal S. Scott, Nomura Professor and Director of the Program on International Financial Systems at Harvard Law School; Director of the Committee on Capital Markets Regulation.

“This bill raises the bar on discount window effectiveness for bank, regulator, and (importantly) supervisor alike; it addresses several operational issues and sources of stigma. The bill makes clear that the default supervisory assumption should no longer be to assign zero value to the approximately $3 trillion of collateral already prepositioned at the Federal Reserve—an amount set to continue to grow, particularly under the direction of this bill. Importantly, the bill also calls for examination of the Fed’s current practice of publishing district-by-district activity, which risks ‘outing’ a bank’s discount window borrowing on a weekly basis—as opposed to only after a two-year lag as legislated under the Dodd-Frank Act,” said Steven Kelly, Associate Director of Research at the Yale Program on Financial Stability.

A copy of the legislation is available here. A one-pager of the legislation is available here.

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