In a recent address at a roundtable on bank liquidity and the lender of last resort, Under Secretary for Domestic Finance Jonathan McKernan outlined the Treasury Department’s new direction on financial regulation. The remarks, delivered on behalf of Secretary Scott Bessent, highlighted a significant shift in regulatory priorities under President Trump’s administration.
McKernan noted that regulators have moved away from what he described as “regulation by reflex,” rolling back measures implemented during the Biden administration. He emphasized efforts to support community banks, refocus supervision on material financial risks, encourage innovation such as digital assets, and tailor regulations more closely to individual institutions.
A major focus of the speech was on liquidity regulation—the rules governing how much liquid assets banks must hold to protect against sudden financial stress. McKernan argued that frameworks created after the 2008 crisis may now be limiting banks’ ability to lend at a time when significant investment is needed for infrastructure related to artificial intelligence, domestic manufacturing supply chains, and national defense.
“The debate on bank liquidity goes directly to whether we will have a financial system that supports growth and economic security—or quietly stifles it under the guise of prudence,” McKernan said.
He acknowledged that post-crisis liquidity requirements succeeded in reducing risk but suggested they were based more on caution than clear evidence or precedent. He pointed out that these regulations have not adapted well to rapid changes in market conditions or technology—especially as seen during stress events like those in March 2023 involving SVB, Signature Bank, and First Republic Bank.
According to McKernan, one consequence has been an unwillingness among banks to use their liquidity buffers during periods of stress due to fears this would signal weakness—a dynamic he called counterproductive. He also addressed ongoing issues with stigma attached to using central bank facilities such as the discount window: “If you only go to the window when things are really bad, then going to the window signals that things are really bad.”
As a solution, McKernan proposed targeted reforms allowing banks’ prepositioned collateral at central banks (such as through the discount window) to count toward their liquidity requirements—within set caps—to provide real flexibility without undermining oversight or discipline. He suggested adjusting these caps dynamically during times of severe stress and linking them to each bank’s actual use of central bank borrowing facilities.
“What this would do is align liquidity regulation with the appropriate role of the lender of last resort. The central bank can, should, and indeed must step in to provide liquidity during periods of severe stress. We should design the framework accordingly,” he said.
Looking ahead, McKernan stated that regulators plan further modernization efforts—including reforms related to deposit insurance coverage for noninterest-bearing accounts; adjustments in anti-money laundering supervision; improved model risk governance for responsible AI adoption; and reducing duplicative examinations among regulators.
He concluded: “With this progress, I would encourage you to think ambitiously about the future of finance and financial regulation. To that end, Treasury will begin to rethink the appropriate activities of banking organizations, with an eye in particular toward facilitating responsible adoption of new technologies.”
