How Countries Manage Large Central Bank Balance Sheets

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.