In a speech, Federal Reserve Board Governor Stephen I. Miran argued that banking regulation is increasingly determining the appropriate size of the Federal Reserve’s balance sheet by boosting banks’ demand for reserves, which can constrain the Federal Open Market Committee’s autonomy in implementing monetary policy. He said the Federal Reserve is actively revising its banking regulations and urged that the impact of regulation on market functioning, credit availability, and monetary transmission be treated as a central design consideration. Miran set out five principles for regulatory decision-making, including explicit cost-benefit assessment, avoiding crisis-driven overreach, limiting the Federal Reserve’s footprint to its statutory mandate, improving transparency, and remaining open to alternative approaches. He supported tailoring requirements by bank type, including additional relief for community banks, and cited recent steps such as the FOMC’s plan to replace maturing agency mortgage-backed securities with Treasury bills and the Board’s rescission of climate guidance, alongside his support for issuing the Board’s stress testing framework for public comment. Linking reserve demand to liquidity rules and capital and leverage requirements such as the enhanced supplementary leverage ratio and the global systemically important bank surcharge, he noted that supervisory preferences can further increase reserve demand. With the FOMC set to end balance sheet runoff beginning December 1 after two and a half years of reductions, he highlighted political and credibility risks from large interest on reserve balances outlays and floated options including paying interest on the Treasury General Account and using short-term assets or repos to smooth reserve swings around Treasury settlement dates. On leverage reform, Miran endorsed efforts to prevent the leverage ratio from becoming the binding constraint in normal conditions and argued that excluding Treasurys and reserves from the leverage ratio denominator would support Treasury market intermediation and reduce the likelihood of stress-driven interventions. He pointed to the earlier COVID-era exclusion and said the transition back to inclusion distorted bank and depositor behavior, including shifting cash into money market funds and increasing usage of the overnight reverse repo facility. He also said the optimal level of reserves could fall as regulations are “right-sized,” making renewed balance sheet reduction possible in the future, and that ending runoff on December 1 should not be viewed as permanent.
Federal Reserve Board 2025-11-19
Federal Reserve Board Governor Miran calls for bank regulatory reform to curb balance sheet regulatory dominance and ease leverage treatment of Treasurys and reserves
Federal Reserve Board Governor Stephen I. Miran highlighted that banking regulation is affecting the Federal Reserve's balance sheet size by increasing banks' demand for reserves, potentially limiting the FOMC's policy autonomy. He outlined five regulatory principles, including cost-benefit assessment and transparency, and supported tailored requirements for different bank types. Miran also discussed leverage reform, advocating for excluding Treasurys and reserves from the leverage ratio denominator to aid Treasury market intermediation and reduce stress-driven interventions.