Liquidity regulation has the potential to impose significant costs and limit the lending capacity and business operations of banks, which must be taken into account before imposing any new requirements, Federal Reserve Governor Michelle Bowman said today. In a speech to the New Jersey Bankers Association, Bowman said she has “significant concerns” about possible regulatory reforms involving liquidity requirements. Fed Chairman Jerome Powell told Congress this week that regulators are working on a package of measures related to liquidity in response to last year’s bank failures.
“Liquidity requirements, if not appropriately designed and calibrated, could trap resources that would otherwise be put to better use, like lending to bank customers,” Bowman said. “Before moving forward, we need to identify gaps in the current framework and build a foundation for any proposed changes that is based on research, evidence and data.”
Revisions to the liquidity framework should be coordinated to ensure that reform efforts are complementary and can support the banking system’s liquidity needs, Bowman added. “When considering new liquidity requirements, we must think about not only calibration and scope, but also the unintended consequences of any such requirements and whether these measures will be effective during stressed conditions.”
