Fed’s Miran Warns That Regulation, Not Markets, Now Drives Balance Sheet Size
Federal Reserve Governor Stephen I. Miran used his remarks in Washington, D.C. to deliver a pointed message: the size and structure of the Fed’s balance sheet are no longer driven purely by monetary policy objectives, but increasingly by the regulatory framework imposed on banks. According to Miran, leverage ratios, liquidity rules, and supervisory preferences have elevated bank demand for reserves to a level that forces the Federal Open Market Committee (FOMC) to make balance sheet decisions based on regulation rather than macroeconomic conditions. This, he argued, is a form of “regulatory dominance” that risks distorting how monetary policy is implemented.
Miran emphasized that the Fed’s balance sheet runoff—shrinking its securities portfolio—is ending not because of an immediate need to support markets or ease financial conditions, but because the regulatory burden compels banks to . As reserves dipped near the lower end of what the Fed considers “ample,” the FOMC opted to stop further reductions beginning December 1. By Miran’s account, this dynamic incentives overpower monetary policy considerations, ultimately constraining the Fed’s independence and operational flexibility.
This narrative represents a significant shift from the post-crisis consensus that more regulation inherently reduces systemic risk. Miran argued that overly restrictive rules have created new fragilities—pushing risk outside the banking sector, altering credit provision, and complicating Treasury market functioning. In his view, correcting these issues is essential before the Fed can securely shrink its footprint or resolve longstanding debates about monetary policy implementation.
Takeaway
How Post-Crisis Rules Create Contradictory Incentives
The speech outlined several key ways regulation drives up demand for reserves. Liquidity rules require banks to hold high-quality liquid assets—primarily reserves and Treasurys—while leverage ratios penalize these identical holdings by increasing capital requirements. This clash between liquidity and leverage standards creates a situation where banks must hold reserves but pay a balance-sheet cost to do so. Supervisory expectations compound this pressure: Miran cited former Vice Chair Randy Quarles’ comments that examiners often prefer reserves over other liquid assets, pushing demand even higher.
Miran argued that these regulatory interactions cause the Fed to hold a larger balance sheet than would otherwise be necessary. Because , the Fed must inject more reserves through asset holdings—effectively maintaining a larger portfolio to meet regulatory-driven liquidity demand. This, in Miran’s view, creates crosscurrents with policy goals, including unintended impacts on financial conditions and confusion about whether the Fed is subsidizing banks through interest on reserves.
The leverage ratio debate was another focal point. Miran reiterated that treating Treasurys and reserves as leverage-intensive assets discourages banks from engaging in core low-risk activities such as Treasury intermediation and repo financing. He argued that this can exacerbate episodes of market stress, and that excluding these instruments from leverage calculations—as regulators briefly did during the pandemic—would reduce the likelihood of turmoil while preventing distortions like the surge in use and overnight reverse repo participation observed later than 2020.
Takeaway
What Miran Proposes For Fixing Balance Sheet And Market Functioning
The Governor laid out several reforms that could give the Fed more autonomy and create a healthier balance between regulation and market functioning. First, he called for a more flexible regulatory environment that better diverseiates between community banks and systemically significant banks. Miran argued that a one-size-fits-all framework strains smaller institutions while pushing activity toward nonbank financial firms in ways driven more by regulatory arbitrage than market efficiency.
He also floated new ideas for how the Fed treats the Treasury General Account (TGA). The Fed currently pays interest on reserve balances held by banks, but not on the TGA. Miran suggested that paying interest—or providing alternative compensation—might smooth Treasury remittances and reduce volatility tied to settlement cycles. He also pointed to proposals from economists Bill Nelson and Annette Vissing-Jorgensen that would allow the Fed to offset or “sterilize” large swings in reserves during Treasury settlement days by holding short-term assets like bills or repos against the TGA.
Looking ahead, Miran believes that if regulation is recalibrated effectively, the Fed will be able to shrink its balance sheet further, reducing its market footprint and curtailing interest payments on reserves. He stressed that stopping runoff now does not mean ending it permanently; instead, the goal is to rewrite the regulatory architecture so that banks can operate in a smaller-reserves environment without impairing market functioning. Achieving this, he argued, is essential to maintaining the Fed’s credibility and preventing the perception that the institution allocates credit or picks winners and losers.
Takeaway
