A more balanced approach, incorporating private market tools like reciprocal deposits, can better support banks’ preparedness while maintaining deposit diversity and stability. banking sector benefits from a range of private market solutions that complement government-backed offerings by providing flexibility and enabling banks to manage deposits more effectively. Reciprocal deposits, for example, offer an alternative by enabling banks to spread large deposits across institutions, keeping depositors’ funds fully insured while maintaining liquidity and relationships. This service can reduce the dependency on the discount window, which — though necessary for last-resort lending — carries the risk of overshadowing market innovations that could alleviate liquidity pressures more sustainably. THE RISK OF “CROWDING OUT” PRIVATE MARKET SOLUTIONS A concern with increased regulatory reliance on the discount window is that it may “crowd out” innovative, private solutions designed to manage deposit flows under stress. Acting Comptroller Hsu’s recent proposal for banks to cover stress outflows over a five-day period relies heavily on a bank’s collateralized reserves and discount window capacity. This approach, though effective, could have the unintended consequence of deterring banks from utilizing market-based tools by making the discount window a more accessible and mandated option. If, as Hsu suggests, large institutions are mandated to routinely test and pre-position collateral at the discount window, mid-sized and smaller banks may face pressure to consolidate deposits at larger institutions with easier access to Fed facilities. This shift could not only reduce smaller banks’ competitiveness but also leave larger institutions increasingly burdened by concentrated deposit flows, paradoxically heightening systemic risk. In this context, CFOs and treasurers managing corporate accounts may prioritize larger banks solely because of their easier access to Fed facilities. Consequently, market-based solutions like reciprocal deposits could be underutilized despite their unique capacity to offer insurance coverage while maintaining depositor confidence. LEVERAGING DIVERSE CONTINGENCY FUNDING SOURCES: AN OPPORTUNITY FOR PRIVATE SOLUTIONS Secretary Yellen’s advocacy for “diverse sources of contingency funding” represents a significant opportunity for private market innovations. By broadening the framework for liquidity resilience to include reciprocal deposits and similar tools, banks can enhance depositor protection and manage liquidity stress without over-relying on the discount window. This diversification not only reinforces financial stability but also fosters an environment where institutions of varying sizes can compete on a more level playing field, particularly when managing uninsured deposits. CONCLUSION: A BALANCED PATH FORWARD Secretary Yellen’s remarks to the ABA challenge the banking sector to confront the vulnerabilities of uninsured deposits with a diverse set of tools. While public solutions like the discount window have an essential place, they should be part of a broader strategy that includes innovative and responsible private-market solutions, which can enhance resilience across banks of all sizes. In this post-election season, new leadership at the U.S. Treasury and the banking agencies will be considering several initiatives to improve the competitive strength and soundness of our banking system and capital markets. A balanced path forward — anchored in diverse contingency funding sources supplied by the private market — will better position banks to weather liquidity stress effectively while supporting depositors’ trust and maintaining financial stability. By emphasizing these values in their services, service providers of these private-market solutions aim to support both clients and the regulatory community in their shared pursuit of a stable and resilient banking system. Jason Cave brings over 30 years of experience in public leadership, regulatory development and financial institution stability. He has held significant roles at the Federal Deposit Insurance Corporation (FDIC) and the Federal Housing Finance Agency (FHFA), shaping regulations to promote stability across the banking, mortgage finance and technology sectors. At the FDIC, Jason led capital markets operations and the bank risk oversight program, delivering large-scale regulatory initiatives by collaborating with bankers, market participants and regulators both in the U.S. and internationally. He represented the FDIC on the Basel Committee on Banking Supervision for over a decade. As the founder of the FHFA’s Office of Financial Technology, Jason built a network of over 100 market participants in the mortgage and technology industries and served on the Financial Stability Oversight Committee, working alongside federal and state regulators to establish new standards for large non-bank firms. He also oversaw Fannie Mae and Freddie Mac as conservator, enhancing their capital, liquidity, operational resilience and readiness programs. Utah Banker 13
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