FedNow System Designed to Ensure Financial Stability, Says Cleveland Fed President
Cleveland Federal Reserve President Loretta Mester reassured the public on Wednesday that the new real-time money moving system being developed by the U.S. central bank is designed to maintain financial stability in the event of bank stress. Mester’s comments come amidst concerns that the new payment system, called FedNow, could potentially worsen banking troubles by enabling rapid outflows from financial institutions, similar to a bank run.
Mester acknowledged these concerns but emphasized that it will ultimately be up to the users of FedNow to set transfer limits in order to prevent any adverse effects. “Banks have tools they could use to mitigate large outflows of deposits,” she stated. Methods such as limiting the amount of money that can be moved within a specific timeframe, restricting the system’s usage to certain individuals, and controlling the direction of money flow in real time were cited as potential solutions.
Furthermore, Mester mentioned the possibility of implementing configurable transaction limits by customer type in future releases of the FedNow Service if deemed necessary.
In addition to these measures, Mester highlighted that banks should also develop strategies to leverage emergency lending facilities and private sources of liquidity to ensure their stability in times of need. “A bank could use liquidity management transfers to replenish its master account balance from private funding sources on the weekend when the discount window is not accessible, which would help to mitigate the effects of deposit outflows on the health of the bank,” she explained.
Mester’s remarks regarding the importance of mitigating financial stability risks in the real-time payment system were prompted by recent events that occurred earlier this year. Troubles at a limited number of banks during this period sparked widespread concerns and led to anxious customers swiftly withdrawing their funds from affected institutions.
It is worth noting that Mester did not comment on monetary policy during her speech, focusing solely on the design and potential risks associated with the FedNow system.
Michael S. Derby reporting from New York for Reuters. Edited by Paul Simao.