BPInsights: March 28, 2026

How to Shrink the Fed's Balance Sheet Without Blowing Up Markets

On Thursday, Federal Reserve Board Governor Stephen Miran gave a speech at the Economics Club of Miami on "Prospects for Shrinking the Fed's Balance Sheet." The Federal Reserve's balance sheet is currently 84 percent of nominal GDP; before the Global Financial Crisis it was 24 percent. Miran indicated that the Fed's balance sheet could be reduced gradually by $1 to $2 trillion without disrupting financial markets. 

Miran gave four reasons why the Fed should shrink its balance sheet.

• Minimizing the footprint of the Fed in markets to limit government-induced distortions.
• Lowering the probability that the Fed would make losses.
• Protecting the boundaries between monetary and fiscal policy.
• Preserving dry powder in case the Fed once again hits the zero lower bound on interest rates.

The speech provided an overview of a simultaneously released Fed working paper that he coauthored with three Fed economists, "A User's Guide to Reducing the Federal Reserve's Balance Sheet." In the speech and accompanying paper, he outlined six steps the Fed could take to facilitate a reduction.

• Reforming regulatory liquidity requirements including by making liquidity buffers more usable and recognizing the liquidity inherent in discount window access.
• Destigmatizing the three sources of Fed credit: standing repo operations, the discount window, and daylight credit.
• Engaging in more active open market operations, particularly around quarter-ends and fiscally significant dates;
• Making it easier for dealers to absorb securities as the Fed reduces its holdings including by reforming leverage ratio and GSIB capital requirements.
• Making alternatives to reserves, like Treasury securities, more liquid and attractive, especially for foreign banking organizations and foreign international institutions.
• Making it more expensive for banks to hold reserves by conducting policy with a slightly higher federal funds rate relative to the interest rate on reserve balances.

Governor Miran foreshadowed some of his analysis in a speech at the Bank Policy Institute in November, "Regulatory Dominance of the Federal Reserve's Balance Sheet." BPI's Chief Economist, Bill Nelson, provided similar prescriptions in recent testimony before Congress.

Just a few hours earlier, Stanford professor Darrell Duffie presented a paper at the Brookings Institution on ways the Fed could reduce the size of its balance sheet. In an interview with Brookings, Duffie stated that the Fed may wish to reduce its balance sheet so that it did not "smother the financial system," but that, if it did, it should shrink in a way that did not "blow up money markets."

Duffie's paper describes four actions the Fed could take to reduce the size of its balance sheet, some of which line up with steps suggested by Miran, although with a greater focus on the role of the payment system and banks' reluctance to incur daylight overdrafts. 

• The Fed could revise its liquidity regulations so that banks feel less pressured to conserve their reserve balances.
• Add liquidity savings mechanisms to Fedwire, the Fed's large-value payment system.
• Tier interest rates on reserves, paying a lower interest rate on reserve balances beyond a specified target or quota.
• Smooth the path of reserves by offsetting unintended shocks to the supply of reserve balances, such as those that occur at the end of each quarter.

These proposals come as Federal Reserve Chair nominee Kevin Warsh approaches the confirmation process. "People familiar with Warsh's thinking said he supports a measured approach for reducing the size of the balance sheet without causing ructions in financial markets," the Financial Times reported this week.

Five Key Things

1. An End in Sight on Crypto Market Structure? That Depends on the Details.

Sens. Thom Tillis (R-NC) and Angela Alsobrooks (D-MD) struck an "agreement in principle" with the White House on provisions in crypto market structure legislation concerning the ability of stablecoins to pay yield. While the text isn't public or finalized, the Senators have been in discussion this week with representatives from both the banking and crypto industries about the contours of the language. The details will help determine whether the Senate Banking Committee can move forward with a markup in April, along with work on a few other unresolved issues besides yield. Coinbase has expressed opposition to the latest legislative language, Punchbowl News reported.

• Next Steps. Tillis suggested he may release the text of the agreement once lawmakers have finished meeting with stakeholders.
• Yield. The agreement between Tillis, Alsobrooks and the White House would prohibit crypto firms from paying "any form of interest or yield to restricted recipients a) solely in connection to holding a payment stablecoin or b) in a manner that is economically or functionally equivalent to an interest-bearing bank," according to a summary described by POLITICO.

2. FSOC Proposes New Guidance on Nonbank Financial Company Designations

The Financial Stability Oversight Council this week proposed updated guidance on the designation of nonbanks as systemically important financial institutions. The FSOC was established by the Dodd-Frank Act after the Global Financial Crisis to help address potential risks to the stability of the U.S. financial system, including by designating systemically important nonbank financial institutions to be subject to Federal Reserve supervision and prudential standards. The updates, which would reinstitute several elements from FSOC's 2019 interpretive guidance, aim to return FSOC's approach to one that assesses the risk of certain activities across markets, rather than singling out individual firms. The guidance would:

• Incorporate "economic growth and economic security" into FSOC's analysis of financial stability risks.
• Prioritize identifying, assessing, and addressing risks through an activities-based approach.  "Under the proposal, the Council would pursue entity-specific designations only if a potential risk or threat cannot be, or is not, adequately addressed through an activities-based approach," the guidance said.
• Enhance analytical rigor by committing to performing a cost-benefit analysis before a designation decision
• Provide a pre-designation "off-ramp" and promote greater transparency. 

3. Meta Liable for Failing to Protect Children

A court in New Mexico found that Meta - which runs Facebook, WhatsApp and Instagram - was liable for failing to protect children from sexually explicit content, human trafficking and other dangers on its platform. The jury found Meta liable for misleading consumers about the safety of its platforms and endangering children, under the state's consumer protection laws, and ordered a maximum penalty for each violation, totaling $375 million in civil penalties. While that penalty is minimal for such a large company, the case - the result of a New Mexico state attorney general lawsuit against Meta - marks an important precedent in holding social media companies liable for harm on their platforms. Similarly this week, a Los Angeles jury found Meta and Google liable for a 20-year-old woman's mental health problems stemming from her longstanding addiction to social media.

4. Joint Economic Committee Examines Fraud and Scams

The Joint Economic Committee this week held a hearing examining fraud and scams. The hearing, titled "The Rising Global Scam Economy: Modernizing Federal Approaches to Protect Americans from Foreign Fraudsters," featured two panels of witnesses from the FBI, Justice Department, Scam Center Strike Force, Federal Trade Commission and other organizations. Here are some highlights.

• From 'pay and chase' to prevention first: The U.S. is focusing on reactive responses to fraud rather than stopping scams at their source, witnesses explained. They largely agreed that prevention should move upstream. Rep. David Schweikert (R-AZ), Chairman of the Joint Economic Committee, said: "How do we stop so it's no longer this sort of 'pay and chase' model, but a 'never leaves the account' model?" FBI official Gregory Heeb said of social media and other firms: "They have to improve the ability of their own platforms to prevent the fraudsters from reaching the victims in the first place." Scam Center Strike Force Director Karen Siefert said of telecom "likely scam" alerts: "That's a start, but the next step is to not even allow that phone call to come through." Law enforcement authorities cannot prosecute or arrest their way out of the scam crisis without active prevention from the private sector, witnesses emphasized.
• Challenging threat environment: They discussed the various challenges at hand, such as the global scale of criminal scam-farm enterprises, ability of AI to amplify scam effectiveness and reach and the sophisticated manipulative techniques that scammers use. "We've had former FBI directors that have fallen victim to schemes like this," Heeb said.
• Fragmented response: The federal response to fraud has been fragmented, confusing and insufficiently centralized, witnesses and lawmakers said. What is required is a cohesive national strategy. Ranking Member Sen. Maggie Hassan (D-NH) described a reporting landscape where victims are sent to various agencies, don't know where to report or what happens after and are turned away. One witness noted that victims report more to banks than to federal portals, which aren't designed for modern bulk reporting. One problem: the federal government lacks a common definition of "scam" and a systematic, government-wide assessment of risks and losses.
• Upstream accountability for social media, telecom: Witnesses called for reforms to require accountability for private sector platforms, including social media and telecom. Witnesses said voluntary efforts from firms are not enough. Rep. Sean Casten (D-IL) expressed frustrations with Meta: "More than 10% of Meta's revenue in 2024 was from these fraudulent ads. They're doing nothing to shut it down. And, you know, there have been bipartisan calls for the FTC to step in and hold Meta accountable; has the FTC initiated any of these investigations to date?" FTC official Lois Greisman said: "I hope you'll understand I can't speak to whether way may or may not be doing anything vis a vis any particular company … to your point of social media as an initial point of contact for scammers - yes, that's what our data show."

5. Top U.S. Prosecutor Acknowledges Lack of Evidence of Wrongdoing in Powell Investigation

G.A. Massucco-LaTaif, a top deputy to U.S. Attorney Jeanine Pirro, acknowledged earlier this month in a closed-door hearing that the Justice Department has no evidence of wrongdoing in its criminal investigation of the Federal Reserve, according to the Washington Post this week. Massucco-LaTaif, chief of the criminal division of the U.S. attorney's office in D.C., said at a March 3 hearing that Justice Department lawyers "do not know at this time" what evidence there is of fraud or criminal misconduct, arguing only that the Fed's renovation project was $1.2 billion over budget and that "it doesn't seem right." "There are 1.2 billion reasons for us to look into it," Massucco-LaTaif told a federal judge. The investigation into Powell has been an obstacle in moving Fed nominations through the Senate, as Sen. Thom Tillis (R-NC) has said he will not move forward with Fed nominations until the probe is resolved.

In Case You Missed It

Traversing the Pond

Here's what's new in international banking policy.

• EU Seeks FRTB Delayed Impact Deal by Mid-June. The EU is seeking to reach an agreement by the first half of June on how to neutralize the impact of the Fundamental Review of the Trading Book - the market risk component of the Basel capital framework, according to Bloomberg. The European Commission plans to consider proposals on changes to the FRTB rules, such as a "bank-based multiplier" to blunt the impact of the market risk requirements on EU banks for three years. The move comes amid concerns about competitive disadvantages for EU banks as the U.S. moves to implement a revised Basel framework. The EC planned to present 13 proposals on potential FRTB rule changes at a meeting scheduled for Wednesday, according to Bloomberg.
• Bessent Suggests BoE Model for Treasury-Fed Ties. U.S. Treasury Secretary Scott Bessent expressed support for the U.S. adopting some elements of the Bank of England's model, such as its closer ties with the government compared with the Federal Reserve and its style of intervention during market stress. "Across the pond, it is admirable how the Bank of England conducts large-scale asset purchases during financial crises and other times of systemic stress, and how they stop their interventions after smooth market functioning has been restored," Bessent told the FT.
• ECB Eyes Private Credit Exposure in Bank Supervision. The ECB will seek details of banks' exposure to private credit amid concerns about loan quality in that sector, according to Bloomberg this week. The planned oversight builds on similar work in 2024 and 2025, but euro area regulatory officials say recent vulnerabilities in private credit have underlined its importance. 
• PRA Fines Bank of London. The Prudential Regulation Authority fined the Bank of London and Oplyse Holdings Limited 2 million pounds for misleading the regulator over their capital positions, "failing to act with integrity, failing to be open and cooperative with the regulator and failing to maintain adequate financial resources," according to a press release this week. The action marks the first time that the PRA has fined a firm for failing to conduct its business with integrity and the first time it has taken enforcement action against the parent financial holding company of a firm.
• BCBS Releases Monitoring Report. The Basel Committee on Banking Supervision this week released its semiannual monitoring report for risk-based capital ratios, the leverage ratio and liquidity metrics, using data collected by national supervisory authorities on a representative sample of institutions in each country. Banks' liquidity ratios increased slightly while Basel III risk-based capital and leverage ratios remained stable in the first half of 2025. Basel III liquidity coverage ratios and net stable funding ratios increased while capital and leverage ratios remained stable for large internationally active banks in the first half of 2025. The report, based on data as of the end of June 2025, sets out trends in current bank capital and liquidity ratios and the impact of the fully phased-in Basel III framework.

The Crypto Ledger

Here's the latest in crypto.

• The Trail from Binance to Iran. The New York Times this week reported on the "trail of clues leading to Iran that Binance missed." The crypto exchange failed to sever ties with Blessed Trust, a "little-known payment processing firm that handled back-office tasks for Binance while using the exchange to move $1.2 billion that ultimately went to entities tied to Iran," until a year after red flags about the firm emerged in public records, according to the Times.
• Warren Warns YouTuber on Crypto Ads for Children. Senate Banking Committee Ranking Member Elizabeth Warren (D-MA) expressed concern in a Monday letter to Jimmy Donaldson, a YouTube influencer known as MrBeast, about his plans to offer financial and crypto trading services to minors. Warren flagged Donaldson's recent purchase of financial app Step, which previously allowed minors to trade crypto, and noted that Donaldson's company has expressed interest in engaging in DeFi.
• UK Bans Crypto Political Donations. The UK government under Prime Minister Keir Starmer has prohibited political donations via cryptocurrency, in an effort to prevent foreign interference in UK politics.

BPI Hires Sam Fabens to Lead Communications Team

BPI this week announced the hiring of Sam Fabens as Head of Communications. Sam will start the position on April 20.

"We are excited to welcome Sam to BPI," said Chief Public Affairs Officer Kate Childress. "With nearly two decades of experience in D.C., he brings insights and perspective to our team that will further strengthen our advocacy for our member banks."

"BPI advocates on complex regulatory and economic issues, and our effectiveness depends on being clearly understood by policymakers, media and the public," said BPI CEO Greg Baer. "Sam brings the expertise to elevate our voice and broaden the reach of our policy work."

Sam joins BPI after 17 years at public affairs agency VOX Global, where he most recently served as a partner and led the firm's financial services practice. At VOX, Sam worked with clients across a range of industries, including financial services, technology and telecommunications, to develop and execute communications campaigns that drive public policy. Sam has a Bachelor of Arts degree from Colby College in Economics and International Studies.

Member News

BMO Introduces Tokenized Cash and Deposit Platform

BMO this week unveiled plans for a new tokenized cash and deposit platform in collaboration with Google Cloud and CME Group. The platform will introduce new 24/7 tokenized cash capabilities that will allow institutional clients to move value more easily and securely using CME Group's permissioned network on Google Cloud Universal Ledger (GCUL).

BPI Job Bank

• AVP, Graphic Designer

Upcoming Events

• 3/31/2026: Federalist Society for Law and Public Policy Studies discussion on "The GENIUS (Guiding and Establishing National Innovation for U.S. Stablecoins) Act in Practice: Key Questions for Stablecoin Regulation"
• 4/1/2026:  American Enterprise Institute for Public Policy Research Discussion on "Monetary Policy, Economic Risks and the Outlook for the U.S. Economy"
• 4/13/2026-4/18/2026: IMF/World Bank Spring Meetings