Recognize Discount Window Capacity
in the LCR

The Problem: Locked Liquidity

The Liquidity Coverage Ratio (LCR) requires banks with more than $100 billion in assets to hold enough High-Quality Liquid Assets (HQLA) to cover projected net cash outflows over a 30-day stress period. As of 2025, LCR-subject banks collectively held $4.1 trillion in HQLA — composed primarily of reserve balances, Treasury securities, and agency MBS.

The critical limitation: discount window borrowing capacity is not counted in the LCR numerator. Banks must pre-fund all projected outflows with on-balance-sheet HQLA. This forces them to hold large volumes of reserves and Treasuries even when they have substantial collateral already pledged at the discount window that could cover outflows in a genuine stress scenario.

The Policy Option

Allow banks to count pre-positioned discount window borrowing capacity secured by non-HQLA collateral (primarily loans) toward the LCR numerator, subject to a cap. Policymakers — including Treasury Secretary Bessent (March 2026) and FDIC Acting Chair Hill (March 2026) — have recently discussed such a framework, with industry discussion centering on a cap equal to 20% of a bank's total HQLA.

Given that LCR-subject banks hold approximately $4.1 trillion in HQLA, a 20% threshold would provide a theoretical maximum of $820 billion in regulatory relief. Importantly, there is already more than double this amount in available discount window capacity against loan collateral (see Gorton, Ross & Ross, 2025), so this proposal would not require any additional pre-positioning of collateral.

Dynamic Cap Designs

The cap design could be static or dynamic. Waxman (2025) proposed a dynamic cap based on actual recent usage — banks could count discount window capacity equal to some percentage of their maximum borrowing over the preceding 12 months. A dynamic design would automatically incentivise regular discount window testing and help normalise use of the facility, directly attacking the persistent problem of discount window stigma.

Other designs might factor in a multiple based on pre-pledged collateral or other operational criteria. Carlson and Styczynski (2025) show that pre-pledged collateral itself increases the likelihood of actual discount window use, suggesting such designs could have self-reinforcing benefits.

Interaction with the NSFR

A critical complication: simply changing the LCR could cause the Net Stable Funding Ratio (NSFR) to become the binding constraint. If banks shift their asset mix from reserves to loans in order to establish discount window capacity, their NSFR denominator increases (loans require 65–85% RSF treatment vs. 0% for reserves), pushing their NSFR lower. To prevent the NSFR from replacing the LCR as the binding constraint, regulators would need to adjust the NSFR simultaneously.

Comparison with International Evidence

The estimated reduction is consistent with international evidence. Nicolae (2020) estimates the LCR's introduction shifted U.S. reserve demand outward by 1.5% of GDP, equivalent to roughly $500 billion today. Kedan and Ventula Vidal (2021) found the LCR increased Eurozone reserve demand by €200 billion — about 10% of the ECB's balance sheet at the time.

Key Caveats

While the theoretical ceiling is $820 billion, the realised reduction in aggregate reserve demand would likely be more muted. Banks still need reserves for intraday clearing and settlement obligations. Moreover, reserves make up only roughly one-third of LCR HQLA, limiting the pass-through from LCR relief to actual reserve reduction.

If the full suite of proposed policy options is not adopted, the NSFR or other unchanged regulations could become the new binding constraint, potentially severely limiting the aggregate impact of LCR reform in isolation.