Investing.com -- The U.S. Treasury Department announced Tuesday plans to reform bank liquidity regulations, aiming to unlock hundreds of billions in new lending capacity for artificial intelligence infrastructure, domestic supply chains, and defense manufacturing.
Under Secretary for Domestic Finance Jonathan McKernan, delivering remarks prepared by Treasury Secretary Scott Bessent, said the current liquidity framework created after the 2008 financial crisis has "excessively and unnecessarily limited banks' ability to do what they are supposed to do -- lend."
The Treasury official said large banks now allocate roughly 25% of their balance sheets to safe assets, up from approximately 10% before the crisis, reducing available capital for mortgages, small business loans, and critical infrastructure financing.
McKernan said the post-crisis liquidity regulations were "novel and even muddled guesswork, an inevitable overcorrection written in the dark shadow of the crisis." He noted that liquidity requirements were historically managed through supervision rather than numerical formulas, and that the architects of current rules assigned requirements based on historical experience and intuition rather than a settled framework.
The Treasury plans to reform the liquidity coverage ratio requirements to give recognition of borrowing capacity associated with collateral prepositioned at the Federal Reserve's discount window. This change would include a cap on recognized discount window borrowing capacity.
McKernan said banks have proven unwilling to draw down liquidity buffers during stress periods, despite regulators intending these buffers to be usable. He said both regulators and markets have treated the buffers as untouchable minimums, causing them to exacerbate rather than absorb liquidity stress.
The official criticized the current framework for entrenching discount window stigma by requiring banks to exhaust regulatory buffers before accessing the facility. He said use of the lender of last resort during severe stress is not a policy failure but rather the central bank's designed function.
McKernan said Silicon Valley Bank, Signature Bank, and First Republic Bank each held substantial Treasury securities and agency mortgage-backed securities during the March 2023 banking crisis, but this liquidity existed only on paper because collateral was not fully prepositioned and discount window access was untested.
The Treasury said regulators could explore sizing the cap on recognized borrowing capacity based on each bank's demonstrated discount window usage, potentially capping it at the lesser of an overall ceiling and some multiple of the bank's borrowing over a specified period.
McKernan said the administration will continue to advocate for expanded deposit insurance coverage for noninterest-bearing transaction accounts. He said the Financial Crimes Enforcement Network and bank regulators will soon propose a rule to refocus anti-money laundering supervision on program effectiveness.
The Treasury also plans to begin rethinking appropriate activities of banking organizations, with focus on facilitating responsible adoption of new technologies.