BNP Paribas analyzes US plans to ease bank liquidity rules to help restore the Federal Reserve’s (Fed) lender-of-last-resort function and potentially enable further balance sheet reduction. The report notes that post-crisis liquidity regulations have forced the Fed to act as a lender of first resort and constrained quantitative tightening, while also increasing stigma around discount-window usage during stress episodes.

Fed balance sheet and liquidity regulation

"Following an in-depth review of capital requirements, the authorities have now prioritised easing liquidity rules, in a move aimed at restoring the Fed’s role as lender of last resort and potentially enabling it to shrink its balance sheet."

"As the rules created a strong, persistent demand for central bank money, they are now preventing the Fed from unwinding its balance sheet."

"The second side effect is that the Fed can no longer fulfil its role as lender-of-last-resort fully during periods of stress."

"The aim of this is to destigmatise the emergency window and thereby restore the Fed’s ability to intervene during stress."

"It might even allow the Fed to reconsider balance sheet reduction."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)