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Credit risk arises from the potential that a borrower or counterparty will fail to perform on an obligation. For most banks, loans are the largest and most obvious source of credit risk. However, there are other sources of credit risk that arise when adverse developments disrupt the orderly operation or stability of the banking system or money and capital markets, or the viability of key market players. Examples of adverse developments range from banking panics, stock market crashes, security breaches, and financial bubbles to currency crises and sovereign defaults. In such situations, financial institutions may experience difficulties in obtaining orderly final settlement of transactions in their accounts or in obtaining funds more generally. These difficulties can spread rapidly to other institutions and markets, ultimately leading to major disruptions to the financial system.
So what is the Fed doing to mitigate such disruptions? I’m pleased to report that there’s a lot of activity concerning credit risk, and I’m proud of the Ninth District’s lead role. In 2017, the Minneapolis Fed began leading the Subcommittee on Credit Risk Management (SCRM). SCRM assists Reserve Bank presidents in developing and implementing policies for managing discount window credit, condition monitoring, and payment system risk. The discount window officer of the Minneapolis Fed chairs SCRM and, in this role, her principal activities include encouraging collaboration among the discount window officers of Reserve Banks across the country, with the goal of ensuring consistent application of policies throughout the Federal Reserve System. In a nutshell, SCRM ensures that all things related to managing credit risk are considered nationwide, and the Minneapolis Fed plays a key role.
Last summer, the Board of Governors of the Federal Reserve System sought input on expanding the real-time monitoring service to institutions of all asset sizes. While the comments are being considered, SCRM continues to work on your behalf. The Federal Reserve strives to offer secure and reliable liquidity to financial institutions via the discount window. Your feedback is critical to helping us determine how we’re doing, identifying opportunities for improvement, and developing new functions. Around August 6, we released a short survey consisting of about a dozen questions. We hope that you completed the survey to share your valuable insights with SCRM. As another option, if you have questions or would like to discuss future services, please email frbsurveys@chi.frb.org or, for general questions, contact your Reserve Bank’s discount window staff.
