While markets focus on the G-SIB and Basel III capital proposals, regulators are signaling that changes to liquidity rules are next. These future regulations could have a more significant impact on markets and the Fed's balance sheet than the current capital-focused reforms.

Current repo market stress is a structural problem caused by tight bank regulations, not a simple liquidity issue. To effectively shrink its balance sheet (QT), the Fed must first ease capital requirements. This counterintuitively acts as a nominal growth impulse by freeing banks to lend.

The removal of leverage lending guidelines will not cause a simple shift from private credit back to banks. Instead, it will accelerate the convergence of public and private credit markets. Banks will now compete across the entire financing continuum, further blurring the distinctions in terms and cost between the two.

The Basel III Endgame proposal addresses risk-based capital. Since U.S. Treasuries already carry a 0% risk weight, the reform does not change banks' incentives to hold them. Any impact on swap spreads is expected to be a temporary, knee-jerk reaction rather than a structural shift.

A major regime change is underway to "reprivatize the financial system." This involves shrinking the Fed's footprint and loosening bank regulations to compel commercial banks to step back into their pre-GFC role as the primary creators of credit and market liquidity, reducing reliance on the central bank.

Unlike past crises, the Federal Reserve is unlikely to provide the next wave of market liquidity via its balance sheet. With rates far above zero, its primary tool is rate cuts. Instead, any new liquidity will likely originate from commercial banks, which are being deliberately deregulated to encourage credit creation.

The G-SIB proposal aims to reduce year-end repo market volatility. However, the market has already proactively managed this risk by shifting activity into sponsor repo, lessening the overall effect of the regulatory changes, making them more modest than they appear on paper.

New regulations like the Basel Endgame are expected to give banks more capital and regulatory clarity. This will encourage them, as the largest mortgage investors, to resume buying mortgages, tightening the 'spread' component of mortgage rates and thus lowering borrowing costs.

The trillions needed for the AI revolution exceed government capacity. The next economic phase will shift from central bank quantitative easing to unleashing commercial bank balance sheets. Regulatory changes, like adjusting the SLR, will enable banks to provide the necessary leverage, echoing the Greenspan-era 90s boom.