U.S. Board of Governors of the Federal Reserve System Vice Chairman for Supervision Randal Quarles discussed the relationship between liquidity and other post-crisis regulation and the Federal Reserve Board’s balance sheet.  Referencing the Federal Reserve Board’s recent proposals to modify the enhanced supplementary leverage ratio and stress capital buffer, Vice Chairman Quarles noted that changes to financial regulations can serve to encourage prudent behavior without any material capital reduction or cost to the system's resiliency and can lead to greater efficiency of the financial system as a whole.   Vice Chairman Quarles discussed the role that insufficient liquidity played in the financial crisis, and explained that post-crisis regulation, such as the introduction of the Liquidity Coverage Ratio in 2014, has resulted in changes to market dynamics and bank behavior.  In particular, he noted that many large banks have adjusted their funding profiles, reducing their reliance on short-term wholesale funding, and their asset profiles, increasing their holdings of cash and other high-quality liquid assets.  Noting that many institutions rely on their reserve balances at the Federal Reserve to meet their LCR HQLA requirements, Quarles discussed the impact that shrinking the Federal Reserve’s balance sheet could have on such holdings.  Vice Chairman Quarles concluded that there is a significant amount of heterogeneity in how these institutions meet their LCR requirements and reserve balances are only one type of available HQLA.  Quarles noted that the Federal Reserve will monitor how the distribution of reserve balances evolves as well as the volume and composition of deposits and movements in interest rates in continuing to shrink the Federal Reserve’s balance sheet and make other monetary policy decisions.

View full text of Vice Chairman Quarles’s speech.