BPInsights: September 27, 2025

One-Size-Fits-All Doesn't Fit the Internal Liquidity Stress Tests

Regulators designed two main requirements - the liquidity coverage ratio and the Federal Reserve's internal liquidity stress tests - to work together to assess different aspects of large banks' liquidity. The LCR was designed to provide a standardized view of liquidity risk, while the ILSTs were meant to provide a bank-specific outlook.

• The Problem. The supervisory process has transformed the ILST requirement into a standardized liquidity measure like the LCR, but with a key difference: these one-size-fits-all assumptions are dictated to banks by examiners through confidential guidance rather than notice-and-comment rulemaking.
• The Costs. Duplicative standardized liquidity requirements constrain bank resources that could be used to finance economic growth. The ILST as a more conservative reinforcement of the LCR also forfeits the holistic view of bank-specific risks that it was meant to capture.
• Learn More. A new BPI blog post examines the origin of the ILST requirement, how the discretion designed to reflect banks' unique risk profiles has become a vehicle for imposing examiner preferences and how the ILST can be returned to its original intent: a complement to, rather than a supervisory reinforcement of, the LCR.

Five Key Things

1. Bowman Discusses Ratings Reform, Capital

At a Georgetown University Psaros Center conference this week, Federal Reserve Governor Michelle Bowman outlined ongoing efforts to reform bank supervision. Bowman referred to a comprehensive assessment of large bank capital requirements as one of the "necessities" for the Fed to accomplish. Here are some other highlights.

• Basel Timing. Bowman said regulators plan to unveil an updated Basel proposal by early 2026.
• Ratings Reset. Bowman emphasized the objective of aligning bank ratings with the core financial risks that matter most, a key goal of the Fed's proposed reforms of the Large Financial Institution rating framework. "Instead of those areas that lead to bank failures, like capital and liquidity and other financial matters, core financial risks, we've been highlighting and focusing on some of the operational aspects of a bank's performance," she said. "So that proposal that we passed at the Board - and it will eventually be finalized later this year - is to reset that framework to ensure that when we're talking about lowering the condition or the rating of a financial institution, that it's relying heavily on at least one component being a financial-related component." She said policymakers at the FFIEC, an interagency body, are looking at the CAMELS rating system as well.
• SVB. Bowman flagged a forthcoming review of Silicon Valley Bank's failure, which could yield insights into potential policy changes. She mentioned supervisory issues as a factor in the failure.
• Tailoring. Bowman also noted the need to avoid applying requirements for the largest banks to much smaller institutions.
• Innovation. Bowman said regulators can provide "guidelines or guardrails" to help banks engage in innovation with confidence.

2. Fed's Barr Backs Decoupling Stress Tests, Capital Requirements

Federal Reserve Governor and former Vice Chair for Supervision Michael Barr this week suggested separating stress testing from binding capital requirements. Currently, the stress test results determine large banks' stress capital buffer (SCB), a key part of their capital requirements. "Decoupling the stress test results from the preliminary [stress capital buffer] would enable the Board to preserve essential aspects of stress testing, including the generation of credible and detailed information on the risk exposures of banks and how their capital levels would be affected by a stress event," Barr said at a Peterson Institute for International Economics event this week. "Such information would be valuable in the supervision of banks in normal times and especially important if banks and the financial system are again threatened by crisis."

• Legal Implications. This recommendation would reverse an ongoing effort toward stress testing transparency, a goal of BPI's legal challenge of the Fed's stress tests. BPI has sought notice-and-comment publication of the stress test scenarios and models. "If the stress tests are no longer used to inform the calculation of a firm's preliminary SCB requirement, the legal justification for publishing the models and scenarios for comment would be eliminated, and I've already discussed the policy grounds for not publishing them," Barr said. "So, the Board could abandon the notice and comment proposal."
• Shadow SCBs. Governor Barr shed some light on potential ways to "pay for" the decoupling: "the shortfall generated by decoupling the stress tests from the SCB may be largely addressed by a regulatory capital requirement linked to the risks in the trading book, with perhaps some other adjustments as required to maintain appropriate capital levels," he noted, further stating that "I would propose that, in exceptional circumstances, the Board could use its capital directive authority to impose individualized capital requirements on specific firms to account for a firm's particular circumstances, including its capital structure, riskiness, complexity, financial activities, and other appropriate risk-related factors." Governor Barr did not describe any measures he would envision to provide transparency or public accountability for these "adjustments" or "individualized capital requirements," nor whether they would be considered confidential supervisory information that would be imposed under a veil of secrecy.
• BPI Response. BPI's Sarah Flowers released a statement on Thursday in response to Barr's comments: "Governor Barr proposes to abandon the Board's current path towards a transparent and publicly reviewed stress test in favor of a black box, where capital increases are imposed in secret and subject to no governing standard or due process. We continue to believe that this approach is poor policy and not consistent with the law or the Board's recent commitments to the public and a federal court. Capital requirements influence the cost of living for American consumers and businesses, making it critical to shed light on how those requirements are set."

3. New Question, Familiar Risks: What Happens if Stablecoins Pay Interest?

What would happen to stablecoin demand, and the financial system, if stablecoins pay interest? The answer to this question illustrates the importance of closing the loophole in the GENIUS Act, a recently enacted law on stablecoin regulation, that allows affiliates or exchanges to pay interest despite prohibiting stablecoin issuers from paying it directly.

If stablecoins can pay interest, demand would plausibly double, according to the Baumol-Tobin model of money demand.

• For example, if households and businesses would demand $2 trillion in stablecoins that do not pay interest (a frequently cited outlook), they would demand $4 trillion in stablecoins that do pay 3 percent interest and the market interest rate is 4 percent.
• There are statistical challenges in estimating the impact of stablecoin interest payments on demand for the digital assets, because the adoption of stablecoins depends on their future use cases, but this model provides useful insight.

A key follow-up question: How would increased demand for interest-paying stablecoins affect the broader financial system? BPI's analysis explores both the demand effects and this critical question.

Why It Matters: Interest-paying stablecoins present two possibilities for the banking system, depending on which assets back them. Both possibilities are alarming for financial stability and economic resilience.

• If stablecoins are backed by Treasuries and reverse repos, stablecoins would reduce demand for bank deposits and therefore the supply of bank credit, because deposits fund loans. This would harm economic growth. The decline in deposits could be as sharp as 20 percent, according to recent economic analysis.
• If stablecoins are invested in uninsured bank deposits, stablecoins could fuel a financial crisis, much like money market funds in 2008 drove the Global Financial Crisis. Stablecoins are susceptible to runs and herding behavior, as noted in academic literature.

Current State: There are about $290 billion in dollar-pegged stablecoins currently outstanding, but that amount could grow dramatically in the coming years. How much it would rise depends on how stablecoins are used.

• Recent estimates range from $500 billion over three years to $2.9 trillion over five years.
• These estimates assume that stablecoins do not pay interest. Demand would likely increase significantly further if stablecoins did pay interest.

Bottom Line: Dramatic growth in stablecoins, even without paying interest, could redistribute vast amounts of liquidity away from the regulated banking sector and introduce new risks to credit supply and financial stability. Demand for stablecoins could double if they are allowed to pay interest, amplifying the threat of destabilizing runs across the financial system. Just as policymakers prohibited payment of interest by stablecoin issuers, they must prohibit payment of interest on stablecoins by affiliates or exchanges and through affiliate relationships to guard the financial system against deposit instability. Stablecoins that pay interest represent a destabilizing force in the banking system and a potential source of future financial crisis, even considering unknown factors and caveats.

4. Op-Ed: GENIUS Act Ties Stablecoin Risk to Traditional Banking Risk

The GENIUS Act, "while claiming to create virtually risk-free backing for the stablecoins it promotes, in fact ties stablecoin risk to banking instability," Mises Institute senior fellow Alex Pollock and former Treasury official Howard Adler wrote in a recent Real Clear Markets op-ed. They cite a historical instance of Circle's USDC losing its dollar peg amid Silicon Valley Bank's failure as an example of how stablecoin risk and traditional banking risk can become entangled. "Could this happen again under the Genius Act? It certainly could," the authors write. "Although it has been virtually never mentioned in the Genius Act announcements and discussion, the act allows uninsured, unsecured bank deposits as an investment for stablecoin reserves. Are these deposits risky? You bet." If a bank that holds a stablecoin issuer's deposits were to fail, amounts above the insurance limit would suffer losses without a taxpayer bailout.

5. BPI Supports FDIC Proposal to Adjust Regulatory Thresholds for Economic Changes

The FDIC's proposal to adjust regulatory thresholds for inflation marks progress toward a bank regulatory framework that better reflects a bank's size, complexity and risk profile, the Bank Policy Institute said in a comment letter submitted today. The proposal could also lay the groundwork for future interagency initiatives to automatically adjust important prudential regulatory thresholds. As a key recommendation, BPI calls for indexing prudential regulatory thresholds to nominal GDP rather than inflation.

"This proposal takes a step in the right direction, but the goal of aligning regulatory thresholds with a growing economy requires further action from all the banking agencies. As the overall economy grows, so do bank assets, but that doesn't mean banks are increasing in risk. Rather than being frozen in time, periodic adjustments to account for inflation would help prevent needlessly saddling smaller institutions with additional safeguards that interfere with their ability to deploy capital and serve their communities." - Sarah Flowers, BPI Senior Vice President and Head of Capital Advocacy

To learn more about why regulations should be adjusted for economic growth, access BPI's factsheet here.

In Case You Missed It

Banking Trades Urge CFPB to Ensure Supervision of Nonbanks

BPI called on the CFPB in four related comment letters this week to maintain oversight of nonbank financial services providers. The letter responded to CFPB proposals that would significantly decrease the number of nonbank firms under its supervisory purview. The CFPB has proposed separate measures to reset "larger participant" supervision for providers of international money transfer services, consumer debt collection, consumer reporting and auto financing. BPI, the Consumer Bankers Association and The Clearing House responded to the money transfer proposal; BPI and CBA responded to the proposals on consumer debt collection and consumer reporting; and BPI responded to the measure on auto financing. The associations emphasized the need for consistent supervisory oversight of both banks and nonbanks. "Our members support vibrant competition and innovation," the trades wrote in the money transfer letter. "However, competition in consumer finance must be based on price, quality, and service - not on regulatory disparities. When nonbanks are allowed to operate with lighter or fragmented oversight, it distorts markets, undermines fair competition, and risks harm to consumers."

The Crypto Ledger

Here's what's new in crypto.

• BPI Urges Comment Extension on Treasury GENIUS Rollout. A broad coalition of financial trades including BPI urged the U.S. Treasury Department to extend the comment period on its implementation of the GENIUS Act. The associations requested an extension of 60 days, for a total of 90 days from when Treasury's advance notice of proposed rulemaking was published in the Federal Register. "This extension would ensure that Treasury receives comprehensive and well-considered responses that support the development of a robust and effective regulatory framework under the GENIUS Act," the trades wrote.
• Crypto Payments Uptake. A recent Kansas City Fed staff paper examines the prevalence of cryptocurrency for payments. "The share of U.S. consumers who report using cryptocurrency for payments - purchases, money transfers, or both - has been very small and has declined slightly in recent years," the paper says. The share declined from nearly 3 percent in 2021 and 2022 to less than 2 percent in 2023 and 2024. The paper also explored the demographic details of crypto users, noting that Black and Hispanic consumers were more likely to pay with crypto than white consumers in both 2022 and 2024. "In 2022, the share of consumers who pay with cryptocurrency was 6.3 percent for Black consumers, 4.4 percent for Hispanic consumers, and 1.4 percent for white consumers. However, by 2024, these shares declined much more for Black and Hispanic consumers than for white consumers: to 3.2 percent, 2.8 percent, and 1.3 percent, respectively."
• Atkins Talks Crypto. SEC Chair Paul Atkins discussed pending crypto market structure legislation in a recent Punchbowl News interview. The legislation contemplates dividing oversight duties on crypto between the SEC and CFTC. Atkins criticized the Howey test - a judicial principle determining when and whether securities law should apply to investments - as "very vague." "Hopefully, if Congress can provide some guidance there, that would be very helpful," Atkins said.
• CFTC Launches Tokenized Collateral Initiative. The CFTC this week unveiled an initiative exploring the use of tokenized collateral, including stablecoins, in the derivatives market. The effort builds on the CFTC's work to implement recommendations from the President's Working Group on Digital Asset Markets.

Traversing the Pond

Here's the latest in international banking policy.

• EBA Efficiency Drive. The European Banking Authority is planning to boost the efficiency of regulation and giving more discretion to supervisory authorities in various countries, according to a Bloomberg article this week citing Vice Chair Helmut Ettl. The efficiency effort appears to strike a contrast with the high volume of third-country bank proposals issued by European authorities over the summer.
• Supervision Reform. Fernando Restoy, chair of the BIS Financial Stability Institute, called for revisiting the supervisory framework in a recent speech. Restoy noted the inherent tradeoffs in supervisory reform. He recommended "transferring some of the risk sensitivity from regulation to supervision," naming the example of more tailored supervisory approaches to banks based on their specific liquidity positions. "There therefore seems to be scope to strengthen both the effectiveness and the efficiency of the current prudential framework by relying more on well-defined supervisory policies," he said. He also acknowledged banks' concerns about excessive discretion by supervisory authorities, insufficient transparency on supervisory criteria and methods and "the issuance of overly prescriptive horizontal supervisory guidance that can make supervision take the role that normally belongs to regulation." Discretion should be bound by "coherent methodologies and consistency checks," and supervisory actions should be "as predictable as possible," he said. "Finally, the scope for issuing horizontal guidelines should be duly confined to supervisory issues and, when sufficiently relevant, be subject to an appropriate cost-benefit analysis." Read the speech here.
• UK and U.S. Launch Taskforce for Digital Assets, Capital Markets. The U.S. and UK governments have launched a transatlantic taskforce that will explore ways to collaborate on digital asset regulations and connect U.S. and UK capital markets. The group will solicit industry feedback and issue a report by January with its recommendations to strengthen cooperation between the two countries.

Morgan Stanley to Offer Crypto Trading in the Near Future

Morgan Stanley is only a few months away from offering crypto trading to retail clients through its E-Trade division. The bank is working with the startup firm Zerohash to provide liquidity, custody and settlement around crypto trading, according to CNBC this week.

HSBC Demonstrates World's First-Known Quantum-Enabled Algorithmic Trading

HSBC, in partnership with IBM, this week announced "the first-known empirical evidence of the potential value of current quantum computers for solving real-world problems in algorithmic bond trading," according to a press release. The experiment attained up to 34% improvement in predicting the probability of winning customer inquiries in the European corporate bond market, according to HSBC.