--- title: "Will Warsh Shrink the Balance Sheet? Bank of America: Likely All Talk and No Action" type: "News" locale: "en" url: "https://longbridge.com/en/news/286872873.md" description: "New Federal Reserve Chair Warsh is viewed as a hawk on balance sheet reduction, fueling rising market anxiety. However, Bank of America states bluntly that Warsh has extremely limited room to maneuver in terms of both scale and composition, with nearly zero direct impact on markets. The real breakthrough may lie in a mechanism reform overlooked by the mainstream—aligning the bank standing repo rate with the interest on reserves" datetime: "2026-05-19T07:43:32.000Z" locales: - [zh-CN](https://longbridge.com/zh-CN/news/286872873.md) - [en](https://longbridge.com/en/news/286872873.md) - [zh-HK](https://longbridge.com/zh-HK/news/286872873.md) --- # Will Warsh Shrink the Balance Sheet? Bank of America: Likely All Talk and No Action Market concerns about new Federal Reserve Chair Kevin Warsh aggressively shrinking the balance sheet may have greatly overestimated what he can actually achieve. Warsh was recently confirmed by the Senate as Fed Chair. Due to his long-standing criticism of the Fed's massive balance sheet, the market widely fears he will rapidly push for large-scale balance sheet reduction. However, Bank of America interest rate strategists Mark Cabana and Katie Craig stated bluntly in their latest research report released on May 18: **Whether in terms of scale or composition, the space Warsh can substantially leverage is extremely limited, and the direct impact on the market is expected to be close to zero.** Bank of America's core judgment is that regarding the size of the balance sheet, the Federal Reserve completed the normalization of quantitative tightening in the fourth quarter of 2025. **To further reduce the size, it would require compressing three major liabilities: currency, the Treasury General Account (TGA), or reserves. Warsh can only substantially operate on reserves, resulting in a limited path and slow pace.** In terms of asset composition, MBS reinvestment arrangements are already underway and fully priced in by the market. The compression effect on the weighted average maturity (WAM) of Treasury securities approaches zero due to offsetting market mechanisms. Neither constitutes a tightening of financial conditions nor triggers signals for an interest rate cut. The report also proposes a scenario not yet focused on by the mainstream market: if the bank standing repo rate (SRP) is set equal to the interest on reserves (IOR), accompanied by reduced information disclosure requirements to lower the "stigma" effect, it could more effectively compress banks' demand for reserves, thereby creating truly operable space for balance sheet reduction. Bank of America believes the actual influence of this proposal may exceed the market's traditional expectations for Warsh's balance sheet reduction path. ## The Scale Dilemma: Three Liabilities, Only Reserves Are Movable After the Federal Reserve's balance sheet completes the normalization of quantitative tightening, **the total size is approximately $6.78 trillion, driven by the liability side. The three core liabilities are: reserves (approximately $3.12 trillion, accounting for 46%), currency (approximately $2.46 trillion, accounting for 36%), and TGA (approximately $807 billion, accounting for 12%).** **** Currency is regarded by the central bank as an "exogenous" liability, beyond the reach of policy tools. Bank of America points out that theoretically, it could be compressed by abolishing large-denomination banknotes, but "this will not happen in the United States." Regarding the TGA, the Treasury Department has clearly stated it has no intention of compressing it. The TGA is expected to rise to $900 billion by the end of the second quarter of 2025 and further to $950 billion by the end of the third quarter. Bank of America believes there is a possibility of marginal adjustment of the TGA through repo investments, but the impact would be minimal; adjustment through the Treasury Tax and Loan (TT&L) channel is "highly unlikely." **Reserves are the most realistic option for Warsh to compress the balance sheet, but each path has its constraints.** A "bank-unfriendly" approach—setting reserve caps or tiered interest rates—would compress bank liquidity, weaken market-making and lending willingness, and thereby drag down the economy. Bank of America believes Warsh is unlikely to adopt this. A "bank-friendly" path involves easing regulations to allow banks to pre-pledge collateral to the discount window to expand high-quality liquid assets (HQLA), thereby reducing the demand for reserves. **Bank of America estimates that this path could ultimately bring a reserve reduction of approximately $200 billion to $500 billion, but the process will be slow. Furthermore, since it does not tighten financial conditions, it does not constitute a reason for an interest rate cut.** ## Composition Adjustment: WAM Compression Impact Nullified by Mechanism Offsets At the asset composition level, Warsh's operational space is similarly constrained by mechanisms. The Federal Reserve currently holds approximately $1.98 trillion in MBS and is gradually compressing this position at a pace of $1 billion to $2 billion per month by allowing maturing and prepaid MBS to roll off and reinvesting in Treasury bills. Bank of America believes the likelihood of selling MBS is extremely low (unless directly repurchased by Fannie Mae or Freddie Mac, which is considered a low-probability event). The current practice is fully priced in by the market and does not constitute a new disturbance. **Shortening the weighted average maturity (WAM) of Treasury securities is another focus of attention.** Warsh might change the reinvestment of maturing Treasury coupon payments from the current proportional allocation across maturities to concentrated investment in short-end instruments (such as 2- to 3-year Treasury notes) to accelerate WAM compression. However, the Fed's reinvestment uses an auction "add-on" mode—participating in auctions as an add-on, directly increasing the stock of short-term Treasury securities rather than replacing long-end instruments. This raises a key question: Will the Treasury Department offset the Fed's WAM shortening effect by adjusting its debt issuance structure? **Bank of America's answer is no. If this assessment is correct, the actual impact of the Fed's WAM compression on the overall Treasury market and financial conditions will be zero, and Warsh will have no logical basis to push for an interest rate cut.** ## Ample Reserves: Warsh Has Neither the Will Nor the Ability to Change It In Bank of America's view, the most critical question regarding Warsh is: Will he support an "ample" or "scarce" reserve regime? Bank of America's answer is: ample, with extremely high certainty. The advantage of an ample reserve regime lies in its ease of operation, ensuring sufficient funds in the banking system, suppressing money market volatility, and supporting relatively loose financial conditions, at the cost of only a slightly larger balance sheet size. In contrast, while a scarce regime could further compress the on-balance-sheet size, it would bring substantial risks such as increased money market volatility and liquidity pressure. Bank of America provides two supporting arguments. First, **Trump places far greater importance on loose financial conditions than on the size of the Federal Reserve's balance sheet, and Warsh is expected to remain open to his policy preferences.** **Second, the Federal Reserve formally adopted the ample reserve regime in 2019, with full support from the current leadership, and some officials hold quite distinct views**—Bank of America cited Federal Reserve Governor Waller's statement in a speech in February 2026: "You don't want banks looking for money under sofa cushions every night... That is extremely inefficient and extremely stupid." Bank of America specifically highlighted the last word in its report. Bank of America believes that Warsh is not only subjectively inclined towards an ample regime but will also be objectively constrained by the consensus within the Federal Reserve. ## SRP=IOR Mechanism May Be the Real Breakthrough Bank of America proposed a mechanism reform plan in its report that goes beyond the traditional framework, **stemming from previous remarks by Dallas Fed President Logan: setting the bank standing repo rate (SRP) equal to the interest on reserves (IOR).** The specific design is that banks can collateralize Treasury securities or agency debt with the Federal Reserve around the clock to obtain cash at a price equal to their deposit rate. The operating model is similar to the discount window but is open all day without discrete operational time nodes. Due to the competitive interest rate and lack of premium, banks will have a stronger willingness to use it, reducing the need to hold precautionary reserve buffers, thereby creating operable space for the Federal Reserve to compress its balance sheet. The Bank of England currently employs a similar mechanism. To further release the effect, Bank of America suggests accompanying reforms to the information disclosure system, specifically including the cancellation of the current weekly report disclosing reserve distribution by region. This report is currently used by market participants to track institutions that may face liquidity pressure. Canceling it could effectively reduce the "stigma" effect of using the SRP tool, making banks more willing to utilize the tool when needed rather than hoarding excessive reserves. The report also points out that bank SRP and dealer SRP should be distinguished: the dealer SRP rate should be about 5 to 10 basis points higher than the bank SRP to ensure banks have the willingness to lend funds in the repo market, while preserving pricing space for free market transactions. Bank of America concludes that "bank SRP = IOR" coupled with reporting system reforms is expected to substantially reduce banks' demand for reserves, thereby providing a truly feasible path for Warsh to compress the balance sheet. This proposal has not yet entered mainstream market discussion, but Bank of America expects it will eventually attract widespread attention—its influence may far exceed the market's current traditional estimates of Warsh's balance sheet reduction capabilities. ### Related Stocks - [BAC.US](https://longbridge.com/en/quote/BAC.US.md) - [FNCL.US](https://longbridge.com/en/quote/FNCL.US.md) - [XLF.US](https://longbridge.com/en/quote/XLF.US.md) - [IAI.US](https://longbridge.com/en/quote/IAI.US.md) - [VFH.US](https://longbridge.com/en/quote/VFH.US.md) - [FNMA.US](https://longbridge.com/en/quote/FNMA.US.md) - [FMCC.US](https://longbridge.com/en/quote/FMCC.US.md) - [BAC-Q.US](https://longbridge.com/en/quote/BAC-Q.US.md) - [BML-L.US](https://longbridge.com/en/quote/BML-L.US.md) - [BAC-L.US](https://longbridge.com/en/quote/BAC-L.US.md) - [BAC-K.US](https://longbridge.com/en/quote/BAC-K.US.md) - [BML-H.US](https://longbridge.com/en/quote/BML-H.US.md) - [BAC-N.US](https://longbridge.com/en/quote/BAC-N.US.md) - [BAC-E.US](https://longbridge.com/en/quote/BAC-E.US.md) - [MER-K.US](https://longbridge.com/en/quote/MER-K.US.md) - [BAC-O.US](https://longbridge.com/en/quote/BAC-O.US.md) - [BML-G.US](https://longbridge.com/en/quote/BML-G.US.md) - [BAC-M.US](https://longbridge.com/en/quote/BAC-M.US.md) - [BAC-B.US](https://longbridge.com/en/quote/BAC-B.US.md) - [BML-J.US](https://longbridge.com/en/quote/BML-J.US.md) - [BAC-S.US](https://longbridge.com/en/quote/BAC-S.US.md) - [BAC-P.US](https://longbridge.com/en/quote/BAC-P.US.md) - [8648.JP](https://longbridge.com/en/quote/8648.JP.md) ## Related News & Research - [A 'crucible of confusion' with no historical precedent is weighing on the economy, BofA says](https://longbridge.com/en/news/286805150.md) - [Is Bank Of America (BAC) Offering Value After Recent Share Price Weakness?](https://longbridge.com/en/news/286683897.md) - [Global fund managers boost equity allocations by record in May, BofA survey shows](https://longbridge.com/en/news/286863791.md) - [US 30-year Treasury yield could rise above 6%, BofA survey says](https://longbridge.com/en/news/286894243.md) - [Bank of America trims Thyssenkrupp voting rights to 4.84% from 5.05%](https://longbridge.com/en/news/286866945.md)