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As central banks exit from QE, there will be important decisions to make on the size and composition of their steady state balance sheets. Small balance sheets have several merits: they help crowd in private markets, and pose fewer financial, reputational and political economy risks, while still allowing satisfactory monetary control. But they also imply a limited supply of central bank reserves in normal times, posing risks to financial stability if other assets cannot be monetised in sufficient size or speed, whether in markets or central bank liquidity facilities, in a liquidity stress. Further strengthening is needed in core market resilience and central bank toolkits for crisis lending. But with liquidity shocks becoming ever larger, faster and broader based, maintaining stability is also likely to involve a materially higher steady state stock of reserves than pre-2008. In this speech, Andrew Hauser discusses ways in which the costs and risks of such an approach might be mitigated.
‘Less is more’ or ‘Less is a bore’? Re-calibrating the role of central bank reserves - speech by Andrew Hauser
