The U.S. Treasury Department is calling for a comprehensive review of bank liquidity regulations, according to remarks delivered by Under Secretary for Domestic Finance Jonathan McKernan at a roundtable on bank liquidity and the lender of last resort.
McKernan stated that under President Trump’s administration, the Treasury has coordinated significant changes in financial regulation, ending what he described as “decades of regulation by reflex” and rolling back previous regulatory measures. The department aims to support both large and community banks, promote responsible innovation such as digital assets, and soon plans to propose updates to bank capital requirements to simplify the framework and ensure competitive parity.
Bank liquidity has become a central issue due to emerging needs like financing artificial intelligence infrastructure, domestic supply chains, and the defense industrial base. McKernan argued that regulations created after the 2008 financial crisis have restricted banks’ ability to lend. He said these rules “have excessively and unnecessarily limited banks’ ability to do what they are supposed to do—lend.”
He noted that while post-crisis liquidity rules reduced the chance of another crisis like 2008, they were developed without established frameworks or historical precedent for setting numerical requirements. McKernan referenced incidents in March 2023 involving SVB, Signature Bank, and First Republic Bank as evidence that current regulations failed to ensure operational readiness during stress periods.
McKernan highlighted several shortcomings: “banks generally have proven unwilling to draw down buffers during stress periods,” which can lead to further hoarding of liquid assets rather than acting as shock absorbers. He also pointed out that this approach has entrenched discount window stigma—the reluctance among banks to borrow from central bank facilities due to concerns it signals distress.
He proposed targeted reforms including giving more recognition within liquidity coverage ratio requirements for borrowing capacity associated with collateral prepositioned at the discount window. This would help balance self-insurance against relying on central bank support during stress periods. Caps on recognized borrowing capacity would be important so that self-insurance remains critical for resilience.
McKernan emphasized: “Central bank borrowing would remain collateralized, subject to conservative haircuts, and limited to solvent institutions.” He added that these changes would better align liquidity regulation with the role of the lender of last resort.
In closing remarks, McKernan said regulators have made progress toward supporting both Wall Street and Main Street through financial system reforms. Additional steps will include advocating for targeted deposit insurance reform and modernizing guidance related to anti-money laundering supervision and responsible adoption of artificial intelligence in banking operations.
“I would encourage you to think ambitiously about the future of finance and financial regulation,” McKernan said. “Treasury will begin to rethink the appropriate activities of banking organizations, with an eye in particular toward facilitating responsible adoption of new technologies.”
