This topic is a very complex and dynamic nexus, especially as regulation and the implementation of monetary policy continue to evolve. One important issue for policymakers, and the one that I will spend some time reflecting on today, is how post-crisis financial regulation, through its incentives for bank behavior, may influence the size of the Federal Reserve’s balance sheet in the long run.
Such a topic is admittedly difficult to address in the time we have today, so I will focus on a particular component of the regulation—the Liquidity Coverage Ratio (LCR)—and its link to banks’ demand for U.S. central bank reserve balances.