(Reuters) – Commercial banks should prepare to borrow more readily from central banks to limit contagion in times of stress and discourage runs by depositors, an expert regulatory panel said on Tuesday in a report about last year’s banking crisis.
The Group of 30 (G30), an international forum of central bankers, economists and private financiers, also said improving accounting standards, more comprehensive stress testing and better supervision, would help prevent future bank failures.
Last year’s collapses of Silicon Valley Bank, Signature Bank, First Republic Bank and Credit Suisse constituted the worst financial crisis since 2007-2009. The U.S. banks all collapsed following depositor runs.
However, reforms proposed so far have under-emphasized the importance of “lender of last resort” or central bank “discount window” lending in limiting contagion, according to the report, which was chaired by former New York Federal Reserve Bank President William Dudley.
Borrowing from central banks continues to carry a stigma as a sign of weakness and can require collateral that banks don’t immediately have handy, meaning the system goes unused, the report said. Reuters reported last year that many small banks are not set up to borrow from the Fed’s discount window.
Fixing central bank lending systems is “the most important, most feasible and lowest-cost reform” to contain panic and discourage depositor runs, the group said. Banks should have enough collateral on hand to cover “all runnable liabilities” via discount window borrowing, it added.
The position echoed guidance issued last year by U.S. regulators.
The report comes as the U.S. banking industry battles proposed reforms to capital regulations which officials say should also help address some of the concerns from last year’s bank failures. U.S. regulators have also intensified scrutinyof risk management and said they will modify stress tests.
Meanwhile, Swiss authorities are seeking greater regulatory muscle, including the power to levy fines, and have considered anti-run measures.
(Reporting by Douglas Gillison; editing by Michelle Price and Nick Zieminski)
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