CHARLOTTE, North Carolina Regulators should keep an "open mind" about making banks pay up front for access to central bank liquidity as part of new rules to ensure that big firms can withstand severe financial stress, a senior U.S. Federal Reserve official said on Friday.
Fed Board Governor Jeremy Stein, weighing in on the complex issue of liquidity coverage ratios being worked on by the Basle banking committee, also said it made no sense to allow unpriced access to central bank 'lender of last resort' capacity.
"It is worth keeping an open mind about the more widespread use of CLF (committed liquidity facility)-like mechanisms," he told a credit market conference hosted by the Richmond Fed.
"It puts a cap on the cost of liquidity regulation. Such a safety valve would have a direct economic benefit, in the sense of preventing the burden of regulation from getting unduly heavy in any one country," he said.
The liquidity coverage ratio (LCR), alongside more bank capital, is supposed to strengthen financial firms and make them less vulnerable to the sort of runs that brought down Lehman Brothers in 2008, at the apex of the global financial crisis.
But Stein outlined a series of important points that still had to be figured out, including how far a firm's access to central bank 'lender of last resort' capacity should count toward the liquidity ratio. He made clear it should not be free.
"It makes no sense to allow unpriced access to the central bank's LOLR (lender of last resort) capacity to count toward an LCR requirement," he said.