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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….