The Under Secretary for Domestic Finance, Jonathan McKernan, has called for a regulatory reset on bank liquidity rules to unlock lending for AI infrastructure and manufacturing.
Speaking at a roundtable on bank liquidity and the lender of last resort convened by Hal Scott, the Director of the Committee on Capital Markets Regulation, McKernan delivered remarks prepared by Treasury Secretary Scott Bessent.
The event occurred on March 3, 2026, amid Treasury efforts to overhaul post-2008 financial regulations.
Regulators have already rolled back Biden-era rules, preserved community banks, refocused supervision on financial risks, and recommitted to tailoring, McKernan said. They also plan capital modernization to end nonbank arbitrage and aid smaller banks, while clearing paths for digital assets.
Liquidity rules now top the agenda to free hundreds of billions or trillions in lending capacity, McKernan said. Post-crisis frameworks excessively limit banks’ core lending role, stifling growth amid AI advances, manufacturing onshoring, and minerals competition.
The 2008 crisis prompted novel numerical liquidity buffers without precedent or clear calibration, relying on history, intuition, and trauma, McKernan noted.
Then-Fed Governor Daniel K. Tarullo said in 2014, “Liquidity regulation is still a relatively new undertaking . . . . There is still need for conceptual work on such questions as how to specify the extent to which banks should be required to self-insure against liquidity risk . . . .”
Events like the March 2023 failures at SVB, Signature, and First Republic exposed gaps despite Treasury and agency mortgage-backed securities (MBS) holdings, as collateral was not prepositioned and discount window access was untested due to stigma and moral hazard fears, McKernan said.
Then-Governor Jeremy C. Stein argued in 2013 that “liquidity regulation … reflect[s] a desire to reduce dependence on the central bank as a lender of last resort (LOLR)” since “a central premise must be that the use of LOLR capacity in a crisis scenario is socially costly,” partly due to moral hazard.
Large banks now hold 25% of their balance sheets in safe assets, up from 10% pre-crisis, curtailing mortgages, small-business, and infrastructure loans, McKernan said. Banks avoid drawing buffers, treating them as hard minimums, which worsens stress and entrenches discount window stigma.
The Group of Governors and Heads of Supervision held that banks should use high-quality liquid assets in stress, falling below minimums, but banks fear signaling weakness if held to 100 percent liquidity coverage ratios in normal times, McKernan added.
Proposed reforms include capped recognition of discount window borrowing capacity for prepositioned collateral in the liquidity coverage ratio and other rules. Caps could tie to past usage or adjust in stress to boost usability, preparedness, and normalize access without undermining discipline.
Treasury will push for deposit insurance expansions for noninterest-bearing accounts, a refocus on AML/CFT effectiveness, AI model risk updates, and reduced duplicative exams, McKernan said. It will also rethink banking activities in light of technologies.
“Liquidity reform will be a critical step toward getting banks back into lending — back into financing homes, factories, infrastructure, and innovation,” McKernan said.
