The European Central Bank (ECB), which is working to reduce excess bank deposits at its counter, will not deflate its balance sheet to the level before the 2008 financial crisis, its chief economist warned on Thursday.
The appropriate level of reserves deposited by commercial banks with euro zone central banks is likely in the future to remain much higher and be more volatile compared to the relatively low levels that prevailed before the financial crisis, said Philip Lane, chief economist. of the ECB, during a conference in Frankfurt.
Faced with the shock caused by the 2008 crisis and the long period of low inflation that followed, the ECB brought its rates into negative territory, bought an astronomical quantity of government and corporate bonds and granted advantageous loans to banks.
All of this helped stabilize the markets and support the economy, an operation repeated during the Covid-19 pandemic.
These campaigns mechanically inflated bank deposits with their national central banks.
Result, from 1,000 to 1,500 billion euros during the first years of the ECB before 2008, the aggregate balance sheet of the central banks of the euro zone, ECB included, swelled to peak near 9,000 billion euros at the start of 2022.
This total has since fallen by around 2,000 billion, in the wake of a tightening of monetary policy in the face of high inflation, but remaining at levels well above the past.
In the future, these central bank reserves should be neither excessively scarce nor excessively abundant, Lane warned.
Concretely, a middle path in this area should help banks distribute loans and thus take risks in a world much more prone to economic and financial shocks, he explained.
In any case, the supply of central bank reserves, whether from debt buyback programs or long-term loans, should be elastic to react in the event of financial shocks, he concluded.
The ECB plans to publish a new operational framework next spring to manage its rates and the appropriate size of its balance sheet.