Federal Reserve Board’s Bowman calls for reforms to bank liquidity rules and the discount window

In a speech, Federal Reserve Board Vice Chair for Supervision Michelle W. Bowman reviewed the post‑GFC prudential liquidity framework and argued that supervisors should focus on whether compliance delivers real resilience in stress. She pointed to incentives in the liquidity coverage ratio (LCR) and related tools that can encourage excess holdings of high‑quality liquid assets (HQLAs), discourage use of central bank backstops, and make liquidity regulation pro‑cyclical during market stress. Bowman highlighted three pillars of the framework: the LCR and net stable funding ratio (NSFR), internal liquidity stress testing, and resolution planning. She argued the LCR’s design can lead banks to over‑allocate to HQLAs in normal times and to avoid drawing them down in stress for fear of falling below minimum requirements, effectively turning the LCR into an “unusable buffer.” The speech also questioned whether the discount window functions as a reliable liquidity backstop, citing stigma linked to weekly aggregate disclosure and above‑market pricing, and pointed to inconsistent rules and processes across the 12 Reserve Banks as a source of uncertainty and potential fragility. Bowman framed the remarks as part of a broader, public discussion intended to inform the Federal Reserve’s approach as it considers adjusting the liquidity framework and modernizing the discount window, without setting out a specific timetable or next procedural steps.