Improving bank liquidity rules is a focus for some of Washington’s top policymakers. In prepared remarks for a March roundtable, Treasury Secretary Scott Bessent called bank liquidity “the next big-ticket item” in the administration’s regulatory reset. Fed Vice Chair for Supervision Michelle Bowman has warned that the current framework leaves banks “hoarding high-quality liquid assets rather than lending.”
They are correct: liquidity coverage ratios (LCRs) are overly restrictive, and the entire banking regulatory infrastructure is too archaic, complex, and burdensome. However, simply easing the LCR won’t significantly reduce banks’ demand for reserves, because the Fed still pays banks interest to hold them through the interest on reserves (IOR) program. Liquidity reform that leaves IOR in place is likely to fall short of its goals, which is one more reason Congress should revoke the Fed’s authority to pay IOR.
LCR Requirements Are Too Restrictive
The LCR requires large banks to hold enough high-quality liquid assets—such as Treasury securities and reserve balances at the Fed—to cover projected net cash outflows over a 30-day stress period. Bessent’s remarks note that safe assets now account for about 25 percent of large banks’ balance sheets, a big increase from roughly 10 percent before the 2008 crisis. Bowman made a parallel case about capital rules at Cato days later, arguing that excessive requirements “impair the banking system’s fundamental function of providing credit to the real economy.”