Fed's Jefferson: discount window reforms help Treasury market

• Key insight: Federal Reserve Vice Chair Philip Jefferson, who is overseeing changes to the discount window, said the exercise is not only important for the banking system but also financial stability more broadly.
• Expert quote: "The U.S. Treasury market serves as the foundation for pricing risk across all asset classes, facilitating the efficient allocation of capital throughout our economy. In this context, the discount window supports Treasury market resilience in important ways." — Federal Reserve Vice Chair Philip Jefferson
• Forward Look: The Fed's ongoing efforts to adjust its discount window practices includes collaboration with the Federal Home Loan Banks on pledgable collateral. 

NEW YORK — As the Federal Reserve works to reform its discount window, it is not only bolstering bank liquidity but also shoring up broader financial stability.

In a Tuesday morning speech, Fed Vice Chair Philip Jefferson said efforts to modernize the central bank's last-resort lending facility are ensuring the future viability of a critical backstop for U.S. government debt.

"The U.S. Treasury market serves as the foundation for pricing risk across all asset classes, facilitating the efficient allocation of capital throughout our economy," Jefferson said. "In this context, the discount window supports Treasury market resilience in important ways."

Jefferson delivered his remarks during the Federal Reserve Bank of New York's annual U.S. Treasury Market Conference. The speech also comes at a time of increasing volatility and fragility within the Treasury market, with yields on 10-year notes hitting their highest levels since the global financial crisis. 

The Fed has been in the process of reforming its discount window policies and technology since 2023, when Silicon Valley Bank and Signature Bank were unable to access the emergency lending facility when other liquidity options dried up. 

While post-mortem reviews have concluded that neither bank could have avoided failure by borrowing from the Fed, the episode revealed shortcomings within the discount window and the ways banks approach it. 

As head of the Federal Reserve Board's committee on Economic and Monetary Affairs, Jefferson has overseen the reform efforts. The discount window falls under his purview because the facility's prime credit rate — what it charges financially sound banks for business-as-usual borrowing — sets the ceiling for the federal funds rate, the Fed's primary monetary policy tool. 

During his remarks, Jefferson outlined three categories of reforms that have been implemented during the past three years: a standardization of operations across the federal reserve system, technological updates and greater collaboration with the Federal Home Loan Banks — another key provider of liquidity to banks.

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All 12 reserve banks are now operating under the same collateral framework with common loan valuation models and processing technologies, Jefferson said, removing longstanding variability throughout the system. The banks also now accept electronic signatures on documents and have adopted simpler forms, faster enrollment and automated pledged loan lists.

In 2024, the Fed implemented a digital discount window, known as Discount Window Direct, that allows banks to pledge collateral online and chat with reserve bank officials, removing the need to conduct business over phone. Jefferson noted that 60% of discount window borrowing now takes place this way. 

Jefferson said the reform efforts have been shaped by feedback from banks and other financial institutions. The Fed issued a request for information on discount window practices and has conducted other exercises to solicit input from users. 

"These improvements, I believe, help reduce the frictions that may make banks hesitant to use the window when they are healthy and reinforce overall confidence in the banking system," he said. "Our work is not done, but I remain committed to working with my colleagues throughout the Federal Reserve System to do just that."

One area of ongoing work is with the FHLBs, which often provide day-to-day liquidity services to banks through a less scrupulous collateral underwriting process. One of the key issues during 2023 was an inability for troubled institutions to move collateral from the FHLBs to the Fed. Jefferson said the central bank has sought to smooth out this process, noting that financial conditions and liquidity needs can shift quickly.

"We and our FHLB partners believe our ongoing efforts and continued commitment to this coordination put us in a much better position than three years ago by meaningfully improving our processes and strengthening relationships and engagement between the two systems," Jefferson said.

Treasury securities are the most readily used collateral for bank borrowing. Because they are backed by the government, the assets present no credit risk and are therefore accepted at the discount window with a minimal haircut, meaning institutions can borrow nearly their full value.

Jefferson said this dynamic makes the discount window the optimal place for banks to turn with their Treasury holdings during periods of stress — as they did during the onset of the COVID-19 pandemic in March 2020 — thus preventing an outright firesale that could have tanked the U.S. sovereign debt market. 

"For institutions that have arrangements in place, this means that pledging Treasury collateral and receiving a same-day loan are straightforward and efficient," Jefferson said. "This speed and ease of access matter for market functioning, particularly when banks active in the Treasury market need liquidity quickly."