Fed Governor Criticizes Capital Treatment of Government Securities Holdings
Commentary by Steven Lofchie
Federal Reserve Governor Stephen I. Miran warned that U.S. banking regulations—not monetary policy objectives—have become the primary force determining the size of the Federal Reserve’s balance sheet.
In remarks at the Bank Policy Institute and Small Business & Entrepreneurship Council, Mr. Miran argued that post-2008 liquidity and capital requirements have sharply increased banks’ demand for central bank reserves. He said this effectively locks the Federal Reserve into maintaining an outsized balance sheet. He warned that this "regulatory dominance" limits the Federal Open Market Committee’s ability to steer monetary policy as intended and risks undermining its practical autonomy.
Mr. Miran emphasized that leverage requirements in particular treat reserves and U.S. Treasurys as balance-sheet liabilities rather than safe, liquid assets essential for financial stability. He said this creates a structural contradiction in which banks face punitive capital charges for holding the same assets regulators require them to maintain for liquidity compliance. He argued that, combined with what he described as an overextension of post-crisis rulemaking, this misalignment has distorted credit markets, increased costs, and pushed traditional banking activities into the nonbank sector.
To restore balance, Mr. Miran called for a comprehensive recalibration of banking regulations, grounded in cost-benefit analysis, proportionality, and transparency. He specifically endorsed excluding Treasurys and reserves from the leverage ratio, arguing that such a reform would reduce artificial constraints on bank balance sheets and strengthen Treasury market functioning. Right-sizing these regulations, he said, would allow the Fed to shrink its balance sheet, limit its intervention in credit markets, and return more fully to its statutory mandate.
Commentary
If U.S. regulators continue to push rules (capital and clearing requirements) that make it more expensive to hold, finance and trade U.S. Government Securities, they will discourage financing institutions and investors from holding those securities, or at least drive up the interest rate that must be paid on those securities to attract buyers. As the amount of government debt grows with no political will to constrain that growth, regulatory policy that makes it more expensive for banks to hold that debt would seem to accelerate the day of reckoning.