I'm not a finance expert, but my intuition is that the market is already good at smoothing out this kind of instability. This is what market makers [1] do and there is no requirement that a market maker needs the ability to make money.

Borrowing costs may be higher because this proposal removes some "free" money that banks can currently lend out. But maybe interest rates will stay the same and instead checking account fees will rise. This could induce some checking account holders to move some of their money to term loans to the bank which the bank could then lend out. It is not clear that interest rates have to rise.

> the money supply is delinked from borrower demand

The money supply available to meet borrower demand need not be created. It already is partially provided by people lending their money for a term to the bank. This proposal merely says that the bank may not use checking account money to meet borrower demand, i.e., it may not represent to a checking account holder that his money is available when in fact it has been lent out to someone else.

[1]: https://en.wikipedia.org/wiki/Market_maker