(Read “spring 2024” in the second paragraph)
FRANKFURT (Reuters) – The European Central Bank’s (ECB) balance sheet needs to be reduced further, but cannot return to the level it was in the institution’s early years, said Philip Lane, the ECB’s chief economist. ECB on Thursday, as monetary policy makers discuss a new operational framework.
The ECB has promised to develop a new operational framework for managing short-term interest rates by spring 2024, and the size of its balance sheet is a key factor.
Total assets held by the institution have already declined by almost €2 trillion since their peak, and are now at €7 trillion, but are still well above the €1-2 trillion range. that the balance sheet reached at the beginning of the existence of the ECB.
“The appropriate level of central bank reserves could remain much higher and be more volatile compared to the relatively low levels that prevailed before the global financial crisis,” Philip Lane told a conference.
Although much lower than the current level, the appropriate level of central bank reserves should avoid the risks associated with reserves that are too low or too abundant, he added.
Such a “middle way” is needed to encourage commercial banks to extend credit despite the risks associated with illiquid assets in a world much more prone to macrofinancial shocks, Philip Lane argued.
These reserves should be provided by a structural bond portfolio and a longer-term structural refinancing operation, in addition to standard short-term refinancing operations, Philip Lane said.
These instruments would then provide longer-term liquidity to the banking system and supply should be elastic to reduce the need for banks to build up precautionary reserves.
Philip Lane also said the ECB should remain open to sustainable increases in its balance sheet in case interest rates fall again.
(Read “spring 2024” in the second paragraph)
(Report by Balazs Koranyi, French version Corentin Chappron, edited by Kate Entringer)
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