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2026-05-29 18:01:01
[Liquidity Rule Adjustments May Only Lead to Mild Balance Sheet Reduction; Warsh's Ideals and Reality Diverge] ⑴ Analysts at BNP Paribas predict that a series of rule adjustments, which will take time to implement, could reduce bank reserve requirements by approximately $700 billion from the current level of $3.1 trillion. Specific measures include allowing banks to include borrowing from the Federal Reserve's discount window in liquidity requirements, introducing central clearing for Federal Reserve repurchase operations, and upgrading agency debt and mortgage-backed securities to the highest rating. ⑵ However, Federal Reserve Governor Waller is skeptical, arguing that due to the structural characteristics of the current financial system, it is impossible to return to the small balance sheet level seen nearly two decades ago before the financial crisis. He predicts that regulatory adjustments will only reduce reserves by $300 billion to $500 billion, and the balance sheet will still exceed $6 trillion, unlikely to shrink significantly. ⑶ New Chairman Warsh has long criticized the Federal Reserve's excessively large balance sheet, arguing that it distorts markets and weakens the policy rate's ability as a primary tool. The Federal Reserve's holdings increased from less than $1 trillion in 2007 to a peak of $9 trillion in the summer of 2022, before falling to $6.5 trillion by the end of 2025 and then expanding again due to technical operations. There are concerns that easing liquidity rules amid the Federal Reserve's overall relaxation of banking regulations could pose significant financial stability risks.
