The Power of Being Early: Lessons From a Fed Insider
Why now is the time for banks to build term funding and stress test for a 6% 10-year U.S. treasury yield
*With the July 3, 2025, passage of Trump’s “Big Beautiful Bill,” the U.S. fiscal landscape has shifted sharply, locking in tax cuts, raising the debt ceiling, and adding trillions to the U.S. budget deficit. This interview was given before the bill’s enactment but anticipated its passage and a number of implications for markets and banks.
You’re attending a risk committee meeting when someone brings up “liquidity mismatch.” Those who’ve worked through multiple market cycles exchange knowing looks.
After 2008, bank liquidity risk management principles were re-recognised with new frameworks and universal minimum standards. In spite of this progress, the core dilemma remains: maturity transformation is intrinsic to banking. As I wrote in The Principles of Banking:
“Undertaking maturity transformation is the key that unlocks the door to economic growth in every country. For a bank, this mismatch of maturity (or tenor) is the very definition of banking and also a balance sheet vulnerability that needs to be managed.”
In this edition of Straight Talk, we hear from Jill Cetina, a BTRM Faculty member, executive professor of finance at Texas A&M University Mays Business School, and a former Federal Reserve officer and Moody’s associate managing director for US bank ratings.
When the cure becomes the risk
In the years since the 2008 crisis, central banks have used their balance sheets to prop up markets and increase liquidity globally. Jill sees this as a profound and, in some ways, troubling shift:
“One of the things that’s most notable for many economies after 2008 is the growing reliance on central bank balance sheets. During crises, fiat currency regimes can respond flexibly, which hard currency regimes cannot, but overplayed strengths now have become weaknesses. Some central bankers have come to realise they have enabled fiscal excess and weakened confidence in fiat money as a store of value.”
While public sector interventions like quantitative easing (QE) may have been necessary in the immediate aftermath of 2008, maintaining them for many years afterwards has, in her view, come at a hidden but real cost:
"Unconventional monetary policy was necessary after 2008 to prevent a contraction in the money supply, but its continuation enabled very bad fiscal policy. QE also drives bank profitability down... Plus, all four rounds of QE in the US also created uninsured deposits and liquidity that rest on the decisions of the central bank. Not all US banks understand how Fed operations directly affect commercial bank balance sheets, and so significant shifts in central bank policy can catch some banks off guard, as developments in 2023 showed."
Her view is that central banks’ use of QE also has contributed to the buildup of elevated government debt in other developed economies, including in the US, Japan, the UK, and France. Now, deglobalisation, aging demographics, less immigration, and a more multi-polar world will act to keep inflation and interest rates elevated and more volatile, creating risks to banks that are “waiting for things to settle down,” as opposed to evaluating how to adapt to this less stable environment more proactively.
Waiting for things to settle down...
Get ahead, stay ready
Jill notes that market volatility in April following the US tariff announcement was not accompanied by funding stress because the US Treasury has been drawing down its cash balance at the Federal Reserve due to the US debt limit. Reduced Treasury balances at the Fed improves dollar liquidity in the global financial system. She believes that once the US Congress passes an increase in the US debt limit later this summer as part of House and Senate tax legislation, US dollar funding and liquidity will begin to become tighter for banks. In this environment, ongoing Federal Reserve balance sheet runoff, so-called quantitative tightening (QT), will become more noticeable in its impact on the financial sector later this year.
As horizon risks come into view, Jill sees particular danger as the US faces widening budget deficits, nudging the Treasury to borrow heavily:
"Once tax cuts and the debt limit are resolved, Treasury will try to fund a much higher budget deficit but with less foreign investment ... the public sector absorbing high levels of domestic savings is classic crowding out."
Her message to financial institutions is clear and pragmatic: do not wait for the headlines about bank funding stress and rising long-dated Treasury yields:
"This summer may prove to be an opportunity for banks to get term funding under better conditions than later this year when US Treasury issuance ramps up and its cash balance at the Fed normalises after debt limit... Get some term funding, build some liquidity, and sit back and eat some popcorn into year-end. Seriously."
She also is concerned that tariffs keeping inflation above target, US fiscal stimulus from the tax bill, and capital deregulation of the largest US banks may create something of a 2024-2025 Q4 replay. Recall that in Q4 2024, long-dated Treasury yields rose as the Federal Reserve cut interest rates. Specifically, Jill believes it is plausible that the 10-year US Treasury yield could first fall in Q3 but then rise notably into year-end if the Federal Reserve cuts interest rates against a backdrop of still above-target US inflation and US fiscal and bank regulatory stimulus, ahead of the US mid-term elections. She encourages banks to stress test themselves for the risk scenario of a sharp rise in the 10-year Treasury yield to 6% in late 2025 or early 2026.
Do not wait for the headlines...
She believes that politicians are likely to delay undertaking needed fiscal deficit reform and that real fiscal reforms will come only after other economic policies have been shown not to work. Jill notes that concerns about US economic policies under both of the last two administrations have caused confidence in the US dollar to weaken and contributed to the strong performance of “harder money,” such as precious metals, fiat currencies with low government debt levels, and some cryptocurrencies.
Bank regulation contributing to US bank risks
In the US, the risks to banks associated with what Jill refers to as “a policy gamble for resurrection” from excess government debt are even more pronounced for two reasons:
First, US supervisors never adopted any meaningful quantitative guardrails around interest rate risk in the banking book after the 1980s US savings and loan crisis.
Second, the US “tailoring” of US bank regulation means that most US banks are not subject to any minimum quantitative liquidity standards.
In Jill’s view, both of these factors contributed to the 2023 failures of Silicon Valley Bank, Signature Bank, and First Republic Bank, and remain unaddressed despite those banks’ failures. While Jill prefers a risk-based regulatory mindset over a rules-based one, she notes that: “In the U.S., we’ve built a legalistic regulatory culture. What we need right now is for banks to have appropriate incentives and operate with a risk mindset.”
She’s unapologetically direct about the responsibilities of bank regulators:
“If you don’t know when banks should hold more capital, you shouldn’t be a regulator. Current proposals to reduce capital at the largest US banks in this environment of elevated inflation and macrofinancial risks are not sound.”
In her view, robust risk management relies not just on financial models, but also on identifying potential blind spots. She is emphatic that groupthink is corrosive: "Public and private institutions always should want to engage constructively with different viewpoints and even critics. It doesn’t mean that they are right, but you need to understand and evaluate others’ perspectives and arguments."
Unassailable, until it isn’t
Jill also pushes back against the assumption of the dollar's unassailable status as the global reserve currency:
“People say, ‘there’s no alternative to the US dollar.’ But you don’t need a replacement, just fraying around the edges of the US dollar’s reserve currency status can be problematic and tighten financial conditions. Central banks and other foreign investors with more stable balance sheets pull back from US financial markets and are replaced with more mark-to-market sensitive investors, causing volatility to rise structurally and asset prices to fall in real terms.”
Investor confidence in the U.S. dollar has hit a 20-year low, with the net percentage of fund managers who are overweight the dollar at its lowest level since 2004, according to a recent Bank of America survey.
In contrast to stablecoins and crypto, her recommendations for preparation are refreshingly traditional:
Consider offering accounts backed by physical gold held in custody that are linked online to a client’s traditional deposits
Consider offering FX-denominated deposits
Strengthen relationships with foreign correspondent banks
Prioritise custodial safety and liquidity over the latest tech trend
Broad analysis and consistent teamwork make all the difference
When it comes to building teams capable of managing risk, Jill is a strong advocate for hiring teams with different perspectives and skillsets and fostering genuine collaboration. She also emphasises including team members in hiring decisions:
“People don’t do this enough: let your team interview candidates. It both creates buy-in and brings different perspectives to the table.”
For her, robust risk management comes not from a single vantage point, but from layered analysis, built across diverse teams with different skillsets. Imagine a bank that has teams looking at these three areas:
Macro trends
Credit, liquidity models
Bottom-up, granular reviews of exposures
“If all three of these analyses flag the same risk, you’d better listen,” she says.
In times of stress, Jill believes that team preparation and culture are the most reliable sources of resilience. Leaders who foster transparency and build analytical strength in advance are far better equipped to adapt when volatility strikes:
“If you create a high-performance and high-trust culture and build analytics in advance, you can adapt fast.”
Jill captures a persistent tension in the world of sound risk management: the difficulty of being taken seriously before a crisis materialises. Those who raise early warnings often find themselves dismissed or ignored until it’s too late.
“You say something people don’t want to hear, or they don’t see others acting on now, and they easily set it aside.”
For Jill, effective risk management is grounded in both courage and humility. It means asking hard questions, even when answers are inconvenient, and engaging with diverse perspectives to notice what others may overlook.
“Further reading….”
In banking, having technical knowledge is one thing; knowing how to apply it under pressure is another. The Principles of Banking includes real-world examples, technical frameworks, and practical advice that professionals can apply immediately:
“The Principles of Banking is easily the most important text for anyone in banking today and should be required reading for all personal development plans. When I was a regulator at the UK Financial Services Authority, managing the Change In Control team, I was responsible for assessing and granting regulatory approvals for complex banking transactions, such as Virgin Money’s takeover of Northern Rock. I relied heavily on Professor Choudhry’s text as a reference throughout the banking license approval process.
“Since then, I have referenced his book often, as a guide continuously during my career in banking as regulator, consultant, investor, CRO and now on the strategy/commercial side, and crucially while setting up a new bank and going through the bank license approval process myself.” —Nihar Mehta, Chief Corporate Development Officer, Monument Bank Ltd, London
