Abstract
Central banks often hold far more assets, and issue more liabilities to finance those assets, than is necessary to provide their domestic payments systems with adequate liquidity. That is to say, their balance sheets are “large” (See Stella (2010) Minimising monetary policy (BIS Working Paper 330)). Frequently central banks are large owing to their holdings of foreign reserves. Yet there is an interesting heterogeneity in how central banks finance large balance sheets. Those with lengthy experience managing large balance sheets almost invariably finance “excess assets” with non-monetary liabilities while those who are relative novices have relied heavily on monetary liabilities—bank reserves. This chapter examines a variety of practice managing large balance sheets since the global financial crisis (GFC). We argue that the recently expanded balance sheet countries may benefit from adopting the policies of their more experienced colleagues who have already “learned by doing.” In financial terms, experienced central banks have found that financing their balance sheets either directly or indirectly with a mix of government securities that are tradable among banks and non-banks is generally more efficient than financing excess assets with bank reserves—fungible only among banks. That is, over time, as central banks gain experience managing a large balance sheet, they tend to adopt more sophisticated and efficient financing strategies. Those financing strategies provide central banks greater scope for managing the risk and duration of their assets.
I thank authorities too numerous to mention individually at many central banks and treasuries for technical discussions as well as participants in seminars at the Federal Reserve Banks of New York and Kansas City, the Federal Reserve Board, Bank of Japan, US Treasury, and Simon Gray, Tadashi Endo, Thorvald Moe, Alessandro Scipioni, and Arto Kovanen for comments on previous versions.
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Notes
- 1.
Pattipeilohy (2016) provides an analysis of central bank balance sheet composition pre and post GFC.
- 2.
Assuming the treasury keeps its accounts in the central bank.
- 3.
Stella (2010) discusses this in some detail.
- 4.
See Johnson and Zelmer (2007)
- 5.
- 6.
Bank of Canada (2009a), p. 10.
- 7.
See Bank of Canada (2009b) for a concise discussion of these changes and their motivation.
- 8.
Canada Mortgage and Housing Corporation (2015).
- 9.
In discussing Norges Bank balance sheet we exclude the sovereign wealth fund elements of the balance sheet. That is, we exclude the “Government Pension Fund Global” account on the asset side and the corresponding equal value liability account due to the Government.
- 10.
NB modified its floor system in autumn 2011. Bank deposits remain higher than a conventional corridor system.
- 11.
Nominal average banknotes and coins outstanding in 2017 were more than 6% lower than in 2015.
- 12.
See Norges Bank (2009), p. 89 {Annual Report}.
- 13.
Gjedrem (2009).
- 14.
This balance sheet will be denoted the “Fed” balance sheet elsewhere.
- 15.
Total US bank assets at end-2007 were $10.888 trillion. (FRB Release H.8).
- 16.
The Fed announced its Term Auction Facility and ECB and SNB swap lines on December 12, 2007.
- 17.
Hrung and Seligman (2015) conclude “…the proper policy response to a financial crisis can involve options beyond an increase in the level of bank reserves.”
- 18.
See FRBNY (2009), p. 28.
- 19.
As of 1 November 2018, these amounted to US$7 million and US$80 million, respectively.
- 20.
For ease of exposition I will refer to these securities simply as “MBS.” MBS constitute the vast bulk of the total. The FOMC announced purchases of MBS and GSE debt in November 2008 and, on March 18, 2009 a longer-dated Treasury securities purchase program. The US Treasury had established a program to purchase agency MBS beginning in September 2008.
- 21.
At end-1951, bank reserves comprised 40% of Fed liabilities but only 2% of Fed liabilities were excess reserves. This state of affairs reflects a “pre-modern” view of required reserves.
- 22.
See also Chap. 14.
- 23.
See 2008 SNB Annual Report.
- 24.
2013 SNB Annual Report page 178.
- 25.
See 2010 SNB Accountability Report, p. 41.
- 26.
Since the Bank Charter Act of 1844, the Bank of England has been required to separately account its banknote issuance activities. This is reflected in the accounting designations “Issue Department” and “Banking Department.” The Issue Department balance sheet reflects the banknote issuing operation of the Bank. Its liabilities are the bank notes in circulation. For ease of comparison with other central banks I have here consolidated the two accounts.
- 27.
UK National Audit Office (2016).
- 28.
See, The Role of the Federal Reserve in Preserving Financial and Monetary Stability Joint Statement by the Department of the Treasury and the Federal Reserve, March 23, 2009, available online at the FRB website.
- 29.
See Bank of England Asset Purchase Facility Fund Limited Annual Report 2009/10, p. 2.
- 30.
See also Chap. 15.
References
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Stella, P. (2020). How Countries Manage Large Central Bank Balance Sheets. In: Bjorheim, J. (eds) Asset Management at Central Banks and Monetary Authorities. Springer, Cham. https://doi.org/10.1007/978-3-030-43457-1_4
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