Fed Governor Barr Warns Liquidity Easing Risks Stability

Federal Reserve Governor Michael Barr warned on Thursday that proposals to ease bank liquidity requirements in order to shrink the central bank's balance sheet would threaten financial stability and undermine bank resilience.

Speaking in New York to the Money Marketeers of New York University, Barr rejected the idea of using regulatory changes to reduce the Federal Reserve's holdings of securities. "I think shrinking the balance sheet is the wrong objective, and many of the proposals to meet this objective would undermine bank resilience, impede money market functioning, and, ultimately, threaten financial stability," he said in prepared remarks. He added that some approaches would actually expand the Fed's presence in financial markets rather than diminish it.

Barr argued that allowing banks to hold less liquidity could increase their reliance on Fed lending facilities during stress periods, citing the 2023 banking strains as evidence that requirements should instead be strengthened. He noted that lower reserves might slow payments, create funding bottlenecks, and heighten risks of panic during deposit outflows. The governor also emphasized that balance sheet size is not the...