We authored this post jointly with our friend and colleague, Professor Jeremy Kress of the University of Michigan Ross School of Business.

On March 19, 2026, the U.S. bank regulatory agencies issued three notices of proposed rulemaking (NPRs) that would substantially weaken the regulatory capital framework for the largest U.S. banks. The proposals would: (1) revise the Basel III minimum risk-based capital rules for the largest banks; (2) recalibrate the surcharge for global systemically important banks; and (3) update the standardized approach risk-based capital rules.

These proposals are the latest in a sustained campaign to roll back the post-crisis capital framework. Earlier this year, the agencies finalized reductions to the supplementary leverage ratio for the largest banks, justifying that move on the premise that risk-based capital requirements would remain a binding constraint (see our September 2025 comment letter opposing those reductions). The latest proposals run directly counter to that premise. And the dilution of stress tests — another pillar of the post-crisis framework — compounds the effect further. The agencies present each change as modest and self-contained. But together, they represent a severe erosion of the safeguards put in place after 2008.

This post summarizes our forthcoming comment letter to the Federal Reserve, FDIC, and OCC opposing the proposals.

Two months ago, we argued that the Federal Reserve's balance sheet was already near its minimum level determined by demand factors, and that shrinking it significantly would risk heightened interest rate volatility without major changes that would themselves carry costs. To be sure, a smaller balance sheet is a worthy goal. It would reduce the Fed's presence in credit markets, limit the fiscal-like character that large-scale asset purchases acquire over time, and preserve dry powder for the next crisis.

Since our February post, both Fed policymakers and academicians have explored the factors influencing banks’ aggregate reserve demand, which is now the key driver of the Fed’s balance sheet scale. While they generally are more optimistic about reducing reserve demand, their proposals have not altered our judgment about the desired sequencing and pace of reserve management reforms.

Importantly, the proposed demand-reducing tools are largely untested at scale in the U.S. financial system. We do not know whether they would work as intended, how large their effects would be, or what unintended consequences they might produce. That uncertainty leads us to counsel caution and care, not confidence, as policymakers consider next steps.

This post discusses a range of reform options that are taking shape.

Whether the Federal Reserve’s balance sheet is big depends on your perspective. The current level of $6.5 trillion is more than six times the level before the Lehman Brothers failure in September 2008. It is also far above the pre-pandemic level of $4 trillion. At the same time, it is $2 trillion below the May 2022 peak of $8.9 trillion. As we noted in our July 2021 post, central bank balance sheets tend to expand sharply during periods of financial stress and do not contract back to their initial level. On occasion, this ratchet has the highly undesirable character of government finance.

Kevin Warsh – the President’s choice to succeed Jay Powell as Chair of the Federal Reserve Board – believes that the Fed’s balance sheet should shrink significantly. Whether he would like to return to the 2019 level of $4 trillion, or to the pre-Lehman level, we don’t know. Regardless, it raises a fundamental question: How should the Federal Reserve manage its balance sheet, and what are the risks of reducing it significantly from its current size?

To anticipate our conclusions, we believe that the current level is close to the level determined by demand factors in the current regulatory and market environment. Unless there are major changes in the Federal Reserve's operations or in regulatory arrangements, shrinking the balance sheet risks significant interest rate volatility that could undermine financial intermediation and credit provision. Reducing reserve demand by relaxing liquidity requirements could leave the banking system more vulnerable to a panic.

This post – co-authored with our friend and colleague, Richard Berner (NYU Stern School of Business) – was submitted in August 2025 as a comment to the U.S. bank regulatory agencies regarding their proposed modifications to the leverage ratio standards for U.S. global systemically important banks.

To Whom It May Concern:

We write to oppose the agencies’ proposal to alter the enhanced Supplementary Leverage Ratio (eSLR).

In our view, the proposal substantially weakens leverage, total loss-absorbing capacity, and long-term debt requirements for global systemically important banks (GSIBs). As a result, it would reduce key safeguards implemented in response to the 2008 financial crisis and add to the risks of serious financial instability and taxpayer-funded GSIB bailouts that Congress and the agencies sought to eliminate….

As most readers of this blog know, the Federal Reserve is an idiosyncratic mix of public and private. The Board of Governors of the Federal Reserve System is a part of the Federal Government, while the Federal Reserve Banks are private, nonprofit corporations and chartered banks owned by their commercial bank members. The operational capacity of the system – the ability to buy and sell domestic or foreign securities, provide loans to banks or foreign central banks, and engage in repurchase agreements or reverse repurchase agreements – belongs to the Reserve Banks. Then there is the Federal Open Market Committee (FOMC), which sets interest rate and balance sheet policy.

Recent attacks on Federal Reserve independence lead us to ask the following question: Who in the Federal Reserve System controls monetary policy? Put differently, to lower short-term market interest rates as he wishes, what aspect of the Federal Reserve would the President need to control? In this post, we attempt to answer this question.

Our new CEPR Policy Insight examines how three key technological innovations—blockchains, distributed ledgers, and tokenization—could reshape the future of finance. We review the current state of the crypto ecosystem, including its internal payments infrastructure, legitimate and illicit uses, and the reasons why crypto has failed to gain traction as a mainstream payments tool. We then turn to U.S. policymakers’ efforts to promote a “payments stablecoin,” considering the goals of an efficient and safe payments system and the barriers that stand in the way. Finally, we compare stablecoins with tokenized deposits and money market funds that replicate familiar financial assets in digital form but have received far less policy attention. We conclude that stablecoins are unlikely to compete effectively outside the crypto world against these no-less-digital instruments.

The Trump Administration is taking steps to integrate crypto into traditional finance, most notably the GENIUS Act’s establishment of a regulatory regime for “payment stablecoins.” To assess stablecoins’ likely impact on the future of payments, we compare them against a potential competitor that adds programmability and the potential for instant, low-cost cross-border settlement to a well-established bank product: tokenized deposits. Faced with crypto entrants in traditional financial services, the largest banks have powerful incentives to innovate, with the goal of maintaining and expanding their market share.

Since the 1970s, banking regulators have worked together through the Basel Committee on Banking Supervision to set minimum standards for internationally active banks. The latest agreement, known as Basel III, came in the aftermath the 2008 financial crisis. The United States adopted the initial Basel III rules in 2013. A decade later, U.S. regulators proposed the “Basel Endgame” to implement the final rules agreed in 2017 and 2019.

The 2023 Basel Endgame proposal included a nearly 20 percent increase in capital requirements for the largest banks. The banking industry fiercely opposed the initiative, effectively killing it in its original form. As of this writing, the fundamental question of how or whether the United States will implement the final Basel III standards remains unresolved. This is not just a technical regulatory matter. The outcome will affect credit availability, economic growth, and financial stability—while determining whether the United States maintains its leadership in international financial standard-setting.

In our view, the Basel Endgame proposal unnecessarily conflated two distinct questions: (1) whether the United States should comply with international regulatory standards, and (2) whether the United States should raise large banks’ capital requirements. While there are strong grounds to answer both questions in the affirmative, they need not be addressed together. That is, the United States could implement the final Basel III standards without raising overall capital requirements.

It was only a few months ago that everyone was focusing on the U.S. economy’s exceptionally favorable fundamentals: growth was solid; driven by migration, the labor force was expanding; inflation was receding; and business formation was robust. Adding to this, U.S. capital markets were the envy of the world, as were the research centers that were advancing the technological (e.g. productivity) frontier. These elements of American exceptionalism helped push the real effective value of the dollar to a near-40-year peak in January.

How quickly things change. Chaotic policies – tariffs, overtly preferential treatment, deportations, attacks on universities, slashed research funding, and general increases in policy uncertainty – risk inhibiting growth, sparking inflation, retarding investment, and stunting technological development. Unsurprisingly, this disturbing new mix is leading many people to anticipate a decline of the dollar and to speculate about the loss of safe-haven status for U.S. Treasuries (see our recent post).

In this post we discuss key fundamentals — including heightened policy uncertainty, dollar overvaluation, and the unsustainable fiscal path — that encourage expectations of a shift away from dollar assets and lend credence to private forecasts of a large dollar depreciation. If these projections prove correct, the key question is whether dollar adjustment will be smooth, or whether there will be a will there be a “sudden stop” where global investors abruptly halt (or even reverse) capital flows into the United States?

Recent developments in financial markets are leading people to ask an uncommon question: are global investors, both domestic and foreign, losing faith in U.S. dollar assets? The most prominent evidence for a loss of confidence is the post-April 2 simultaneous decline in the U.S. dollar, the U.S. equity market, and U.S. bond prices, accompanied by a surge in the price of gold. There also are signs of a rising risk premium on those U.S. assets (Treasury issues) that had long been viewed as the safest on the planet (see here).

Previously, when a global shock sharply boosted market risk, investors fled into Treasuries. This time really has been different. In this post, we explore the new risky pattern in U.S. asset markets and consider various explanations, including a change in relative inflation expectations and heightened pressure on intermediaries to deleverage.

The simplest hypothesis is the most troubling: that global investors are losing confidence in the United States and fleeing U.S. assets and the dollar. At this point, we lack hard data to confirm this bleak proposition. However, there may be little warning of an intensified shift away from U.S. assets. If that happens, it will be too late to find low-cost ways to “de-risk” exposure to chaotic U.S. policy developments.