Liquidity rule adjustments may only result in moderate balance sheet reduction, with a gap between Waller’s ideal and reality.

(1) BNP Paribas analysts estimate that a series of regulatory adjustments, which require time to be implemented, may reduce the demand for bank reserves by approximately $700 billion from the current level of $3.1 trillion. Specific measures include allowing banks to count borrowings from the Federal Reserve's discount window towards liquidity requirements, introducing central clearing for Federal Reserve repo operations, and upgrading agency debt and mortgage bonds to the highest rating. (2) However, Federal Reserve Governor Waller is skeptical about this, believing that due to the structural characteristics of the current financial system, it is impossible to return to the small-scale balance sheet levels from nearly two decades ago before the financial crisis. He expects that regulatory adjustments can only reduce reserves by $300 billion to $500 billion, with the balance sheet remaining above $6 trillion and unlikely to decline significantly. (3) The new chairman, Walsh, has long criticized the Federal Reserve's oversized balance sheet, arguing it distorts markets and weakens the effectiveness of policy rates as the main tool. The Federal Reserve's holdings grew from less than $1 trillion in 2007 to a peak of $9 trillion in the summer of 2022, then dropped to $6.5 trillion by the end of 2025, only to expand again due to technical operations. There are external concerns that relaxing liquidity rules amidst the Federal Reserve’s overall easing of bank regulation may bring significant financial stability risks.