Background
Why Shrink the Balance Sheet?
This guide explains the 15 policy options from the Federal Reserve Board staff working paper(Anderson et al., 2026). Options are organised into two broad categories: those that reduce reserve demand within the banking system, and those that reduce non-reserve liabilities such as the Treasury General Account. Click any card to read the full analysis.
Category A · Reserve Demand
Reducing Equilibrium Reserve Demand
Allow pre-positioned discount window borrowing capacity (secured by non-HQLA collateral) to count toward the LCR, up to a cap of 20% of total HQLA.
Dynamically lower the minimum LCR threshold during stress to signal that liquidity buffers are meant to be drawn down, not hoarded to avoid supervisory scrutiny.
Allow banks to count discount window inflows in Internal Liquidity Stress Tests at overnight and 30-day horizons, not just 90-day and one-year scenarios.
Reform resolution plan guidance to assume extended, gradually declining discount window access post-resolution rather than cutting off access after only a few days.
Exempt Treasury securities from the Supplementary Leverage Ratio for bank holding companies and dealer affiliates to expand repo market absorption capacity.
Instruct examination teams to treat Treasury bills and reserve balances strictly on par in all supervisory liquidity stress exercises.
Shift from a floor system where EFFR clears below IORB to one where EFFR clears above, eliminating FBO arbitrage and reducing banks' incentive to park excess reserves.
Replace the flat IORB rate with a tiered schedule that penalises excess reserves with a lower yield, incentivising reserve-rich banks to lend to constrained peers.
Broaden FIMA repo eligibility to sovereign wealth funds, extend terms to 84 days, and raise counterparty limits to make Treasuries more liquid globally.
Coordinate with foreign regulators and commit publicly to the permanence of central bank swap lines, reducing FBOs' structural incentive to hoard reserves.
Frame Standing Repo Operations explicitly as a routine liquidity tool; reinforce via supervisory guidance so regular SRP borrowing is seen as healthy treasury management.
Back TGA balances with Treasury bills to offset reserve swings caused by tax seasons and debt-limit episodes, reducing banks' precautionary buffer requirements.
Upgrade Fedwire with an LSM that queues non-urgent payments and bilaterally nets offsetting flows, allowing banks to settle large volumes with fewer pre-loaded reserves.
Category B · Non-Reserve Liabilities
Reducing Liabilities Outside the Banking System
Revive a modernised Treasury Tax & Loan programme, shifting a portion of the TGA from the Fed to commercial banks by reducing the Fed buffer from 5 days to 2 days of operating needs.
Reduce the interest rate paid on the foreign repo pool, cap usage, or otherwise make the pool less attractive relative to Treasury bills for foreign central banks.