Treasury Department Plans Major Changes to Bank Lending Rules

Federal officials are preparing a comprehensive overhaul of banking liquidity regulations, claiming current rules restrict lending too much. The review comes after the Silicon Valley Bank collapse highlighted weaknesses in how banks manage cash during financial stress.

WASHINGTON – Federal banking regulators and Treasury Department officials are preparing a major overhaul of rules governing how much cash banks must keep on hand, claiming the current system restricts lending and fails to protect financial institutions during crises.

During a regulatory discussion on Tuesday, top officials from the Treasury and Federal Reserve outlined potential changes they believe would allow banks to better use emergency funding tools while reducing the cash reserves they’re required to maintain. The proposal represents the latest effort by the Trump administration to reshape banking regulations.

Jonathan McKernan, who serves as Treasury’s under secretary for domestic finance, told the regulatory roundtable that existing liquidity requirements “has excessively and unnecessarily limited banks’ ability to do what they are supposed to do—lend.”

McKernan proposed allowing banks to count collateral they place with the Federal Reserve’s discount window toward their liquidity requirements. The discount window serves as an emergency lending facility for banks, but financial institutions rarely use it due to concerns about appearing financially troubled. By recognizing this collateral as available borrowing capacity, officials hope to reduce that stigma while ensuring banks maintain adequate reserves to handle deposit withdrawals.

The Treasury official also suggested these recognition limits could be modified during periods of financial stress.

The 2023 failure of Silicon Valley Bank, which experienced massive deposit outflows within days, has intensified regulatory attention on liquidity rules designed to ensure banks can access funds quickly during emergencies. Previous attempts at reform under the Biden administration never came to fruition.

Earlier on Tuesday, Federal Reserve Vice Chair for Supervision Michelle Bowman called for “fundamental reform” of the discount window system, pointing out inconsistencies in how the nation’s 12 Federal Reserve banks implement their own procedures and requirements for accessing emergency funds.