Fed's Bowman: Should Review the Effectiveness of Liquidity Regulatory Framework, Reform the Discount Window Mechanism

Odaily News Fed Governor Bowman delivered a speech titled "Liquidity Resilience, Financial Stability, and the Role of the Federal Reserve" at a roundtable hosted by the Capital Markets Regulatory Committee. She pointed out that 15 years after the global financial crisis, it is necessary to reassess whether the current bank liquidity regulatory framework truly enhances the resilience of the financial system, rather than merely appearing effective on a compliance level. The current prudential liquidity framework mainly includes tools such as the Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR), Internal Liquidity Stress Testing (ILST), and resolution planning, which theoretically can help banks cope with short-term withdrawals and long-term market shocks. Without fundamental reform of the discount window to make it a truly usable and consistently rule-based liquidity backstop, the banking system will continue to build additional buffers by hoarding high-quality liquid assets, thereby compressing credit supply, driving up demand for reserves, and forcing the Fed to maintain a larger balance sheet. Future reforms should focus on whether regulatory requirements truly translate into systemic resilience and carefully assess the potential impact of liquidity regulation on bank behavior and the macroeconomy.