May 13 - The Federal Reserve needs to rethink how it provides swift liquidity to banks, a report from the Federal Reserve Bank of New York said on Monday.
The discount window is a Fed facility that exists to provide collateralized loans to deposit-taking banks. While the discount window historically has been thought of as a source of emergency funding, the Fed has changed the terms on the tool to make it more attractive and has encouraged banks to tap it when their respective liquidity is scarce. What’s more, the Fed is currently in a push to make sure banks are signed up and ready to use the discount window.
Discount window issues have forced the central bank to stand up emergency lending facilities in times of trouble to bridge the lack of interest in the traditional lender-of-last resort tool. The New York Fed paper said facilities like the BTFP - it’s now closed for new borrowing - may be needed in the future. “Temporary facilities could be designed specifically to address the source of the problem at hand,” the researchers wrote. “This is in essence what the Fed has done in recent years when it introduced the Term Auction Facility at the onset of the Global Financial Crisis in December 2007, or the Bank Term Funding Program in March 2023.
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