LONDON (Reuters) - Dallas Federal Reserve Bank President Lorie Logan on Tuesday floated the idea of allocating a "modest" part of the Fed's balance sheet to loans and repos, perhaps holding a daily auction of discount-window loans.

This would encourage banks needing liquidity to be ready to borrow from the Fed and improve the efficiency and effectiveness of policy implementation, Logan said.

"Such a facility might also smooth the redistribution of reserves around the banking system," Logan said in remarks prepared for delivery to a Bank of England conference in London.

"If the Fed held a daily lending auction, the depository institutions most in need of reserves on any given day would likely place the highest bids, automatically redistributing liquidity away from firms with less need."

The Fed uses its so-called discount window facility to lend to banks that need ready cash, often in exchange for less-than-liquid collateral such as business loans.

Particularly in recent years, the Fed has tried to encourage banks to use the discount window as a normal source of funding. Banks, however, have long viewed it as a last resort option, and fear that tapping it could signal to competitors and shareholders that they are in distress.

Fed policymakers like Logan say that shunning the discount window because of this perceived stigma robs individual banks and the financial system as a whole of an important liquidity backstop.

"Auctioning a fixed quantity of discount window loans each day could encourage banks' operational readiness and demonstrate that borrowing is a normal activity for healthy firms," Logan said.

"Let me just strongly emphasize that the (Fed) is not considering any changes to its implementation framework, and even beginning to consider such a tool would require substantial conversation, analysis and learning from the experience of other central banks."

Logan did not use her prepared remarks to comment on monetary policy or the economic outlook, but focused primarily on the Fed's balance sheet, which she managed in her previous job at the New York Fed.

She argued that the Fed's balance sheet would work best if the mix of maturities of its securities holdings roughly matches that of the debt that the U.S. Treasury issues. Currently, the Fed's holdings are heavily weighted toward longer-term securities, she noted.

Once the Fed stops shrinking its balance sheet and allows it to expand again, she said, "it would make sense in the medium term to overweight purchases of shorter-dated securities so as to more promptly return the Fed's holdings to a neutral allocation."