US REGULATORS are preparing to introduce a plan to require that banks tap the Federal Reserve’s discount window at least once a year to reduce the stigma and ensure lenders are ready for troubled times.

The proposal, which is being drafted behind closed doors by the Office of the Comptroller of the Currency, Fed and Federal Deposit Insurance Corporation (FDIC), is the latest response to last year’s regional bank crisis. The turmoil spotlighted that some lenders were not even set up operationally to quickly borrow from the window in a pinch.

Michael Hsu, the acting comptroller of the currency, said the changes regulators will propose aim to ensure banks are more prepared to respond to sudden flights of deposits.

“We want to make sure that banks have enough resources to meet any kind of outflows within five days-especially those related to uninsured deposits,” Hsu said. He added that the plan will also seek to remove any stigma associated with borrowing from the Fed’s discount window.

Bolstering banks’ liquidity backstops became a priority for US regulators after several midsize lenders, including Silicon Valley Bank (SVB), failed last year. Since then, the government has called for Federal Home Loan Banks, another source of funding, to direct lenders to the Fed in times of extreme stress.  

On Thursday, Hsu laid out several changes that regulators are likely to propose in the coming months. He said that lenders would also have to craft plans to borrow in a pinch, including what collateral they did pledge. Banks would face fresh a requirement to borrow from the discount window once a year to test their ability to do so, he added.

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“It’s almost like doing a fire drill. If it’s required, when a real liquidity fire comes, then the banks can do it in real life,” he said. “Operationally, banks would have to go borrow US$1, US$100 million, whatever it might be, just to ensure that the procedures, the systems, the people, everything is there and in place to access the discount window.”

Hsu is the latest top US regulator to flag the need for banks to be more comfortable using the discount window. “Banks need to be ready and willing to use the discount window in good times and bad,” Michael Barr, the Fed’s vice chair for supervision, said in December.

Borrowing from the discount window, which dates back to the Fed’s creation in 1913, has often carried a stigma. The Fed itself discouraged borrowing from the facility for long periods throughout its history, and banks were reluctant to use the facility, ostensibly for institutions on the brink of insolvency, for fear that investors would see it as a sign of operational weakness.

The Fed has worked to change that perception over the past two decades and now encourages banks to sign up for it in case they need it in times of stress. But the stigma has been tough to shake. Discount window loan information becomes public after two years, and banks largely prefer to borrow from other places when they need liquidity.

To make the discount window more attractive, the government is considering ways to make it cheaper for borrowers, according to a person familiar with the rule-writing effort. The proposal could also affect how assets such as high-quality bonds and mutual funds, which are frequently held as collateral to gain discount-window access, can be counted on a bank’s balance sheet, said the person, who asked not to be identified as the plans have not been released.

The Federal Reserve and the FDIC declined to comment.

The failures of SVB and Signature Bank last March prompted the Fed to relax terms for lending through the discount window and to launch an emergency lending facility.

In an interview later Thursday on Bloomberg Television’s Balance of Power, Hsu was asked whether regulators are considering lowering discount window rates. “That will be a decision for the Fed,” he responded.  The speed of bank runs is one reason why regulators are looking to make changes, he added.

The bid to change rules affecting discount window borrowing and bank liquidity requirements follows last July’s sweeping proposal to require many banks to hold more capital to help them withstand a crisis. Wall Street giants, which would be most affected, are waging a fierce lobbying campaign to scuttle the effort.

During the TV interview, Hsu said that regulators are reviewing industry comments and are “open-minded” to considering improvements to their capital proposal. BLOOMBERG