Quarles: Use of HQLA for stress-testing under consideration by central bank

Use of high-quality liquid assets (HQLA) as part of the stress-planning scenarios for large banks is something that the Federal Reserve is considering, the top supervisor for the agency said Thursday.

In a speech, Fed Vice Chairman for Supervision Randal Quarles said if firms could assume that an HQLA provision from the Fed was available in their stress-planning scenarios, “the liquidity characteristics of Treasury securities could be the same as reserves, and both assets would be available to meet same-day needs.”

In speaking to the Money Marketeers of New York University in New York, Quarles said the Fed is considering several methods for achieving that result. The first would be for the Fed to adopt a policy whereby financial firms could assume that the discount window can be used in their liquidity-planning stress scenarios under certain conditions.

“We could build on this approach by also allowing firms to rely on the discount window in their ILSTs (internal liquidity stress tests) as a means of monetizing, for example, Treasury securities in their scenarios,” Quarles said. “This approach would acknowledge a role for the discount window in stress planning, improve the substitutability of reserves and Treasury securities in firms’ HQLA buffers, and maintain the overall level of HQLA that firms need to hold.

“Such an approach could improve the efficiency of monetary policy implementation, as firms might show a greater willingness to reallocate to Treasury securities, reducing reserve demand and improving market functioning,” Quarles said.

Two other approaches suggested by Quarles for achieving the results he mentioned were:

  • Set up a new program or facility, such as a standing repurchase agreement, or repo, facility for banks, with the aim of improving the substitutability of reserves and Treasury securities for the banks. “While this option is still of interest, there may be benefits to working first with the tools we already have at our immediate disposal,” Quarles noted.
  • Changing the surcharge for global systemically important banks (GSIBs) to averages. “If we were to propose that change, it would not alter the stringency of the surcharge. As such, this option is something that we are actively considering.”

Quarles comments: The Economic Outlook, Monetary Policy, and the Demand for Reserves