Board of Governors of the Federal Reserve System ("FRB") Vice Chair for Supervision Randal Quarles described the relationship between the Federal Reserve's balance sheet and Liquidity Coverage Ratio ("LCR") requirements.
In remarks at the Hoover Institution Monetary Policy Conference at Stanford University, Mr. Quarles examined the impact that LCR requirements have had on the U.S. banking system and the Federal Reserve's balance sheet. Mr. Quarles explained how liquidity regulations are a driving factor in the reduction of the Federal Reserve's balance sheet. He stated that the LCR requirement increases bank needs for High-Quality Liquid Assets, such as cash and securities. This has led to firms' increased reliance on reserve balances, thereby decreasing the Federal Reserve's reserve balances and balance sheet. Mr. Quarles said that he expects this pattern to continue for another few years until "the point of 'normalization' of the size of the Fed's balance sheet – that is, the point at which the balance sheet will begin to expand again to support the underlying growth in liabilities items such as Federal Reserve notes in circulation."
Mr. Quarles noted other factors that impact firm behavior and federal regulation, and emphasized how important it is for regulators to analyze relationships and movements spurred by regulation.
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