SPEECH
Back to normal? Balance sheet size and interest
rate control
Speech by Isabel Schnabel, Member of the Executive Board of the
ECB, at an event organised by Columbia University and SGH Macro
Advisor
New York, 27 March 2023
1 ]
On 1 March, the ECB started quantitative tightening (QT) after eight years of balance sheet expansion.[
At the peak in 2022, the Eurosystem held monetary policy assets corresponding to around 56% of euro
area GDP. This was substantial both from a historical perspective and in international comparison (Slide 2,
left-hand side).
The first wave of balance sheet expansion was a response to the low-inflation environment prevailing in
the aftermath of the euro area sovereign debt crisis. Between 2014 and 2016 headline inflation ran
2 ]
persistently below our target of 2%, averaging just 0.3% (Slide 2, right-hand side).[
As the key policy rate had already been lowered into negative territory in 2014 and was approaching the
effective lower bound, the ECB started employing "unconventional" monetary policy tools. It offered banks
a series of targeted longer-term refinancing operations (TLTROs) and conducted asset purchases to
stimulate economic activity and raise inflation.
These operations led to a sharp increase in monetary policy assets and, correspondingly, to a rise in
central bank liabilities in the form of excess reserves - that is, reserves held by banks beyond minimum
requirements (Slide 3).
The second wave of balance sheet expansion came with the ECB's response to the pandemic. The launch
of the pandemic emergency purchase programme (PEPP) and adjustments to the third series of TLTROs
resulted in a further large increase of our monetary policy assets. These measures were necessary to
3 ]
protect the euro area economy from falling into a full-blown financial crisis and economic depression.[
Last July, balance sheet growth came to a halt when we ended net asset purchases under the asset
purchase programme (APP). Since autumn, the size of the balance sheet has been declining as banks
began repaying their outstanding TLTRO loans. The balance sheet has declined further since the
4 ]
beginning of March, when we stopped fully reinvesting maturing securities bought under the APP.[
Further TLTRO repayments and a gradual run-down of our monetary policy bond portfolio imply that our
balance sheet is expected to decline meaningfully over the coming years, thereby reducing excess
5 ]
liquidity.[
However, the size of our balance sheet will not return to the levels seen before the global financial crisis.
Over the long run, the ECB's balance sheet size is driven by growth in reserve requirements and by what
6 ]
are known as autonomous factors, which are beyond the control of the Eurosystem.[
Autonomous factors include official sector deposits and, most importantly, banknotes in circulation, which
7 ]
have shown a strong upward trend since 2007.[ If, over the coming years, these autonomous factors
were to increase in line with recent historical patterns, we estimate that excess liquidity will be fully
8 ]
absorbed by 2029.[
At that point, the Eurosystem's balance sheet would still be about three times the size it was in 2007, and
it would need to increase again to meet growth in currency demand.
From a monetary policy perspective, the question is whether the decline in the volume of excess reserves
will affect our ability to implement monetary policy. In recent years, excess reserves have been
instrumental in effectively steering short-term interest rates.
In my remarks today, I will first explain why the decline in excess reserves matters for the conduct of
monetary policy. I will also describe why it may be difficult to return to the way we implemented monetary
policy before 2008, when excess liquidity was limited.
I will then illustrate the benefits and costs of alternative operational frameworks that differ in the way they
provide reserves to the banking system, and discuss how these may accommodate the characteristics of a
heterogeneous currency union like the euro area.
These remarks reflect my own current thinking on the matter, which may evolve as the Governing Council
reviews the Eurosystem's operational framework - a process we hope to conclude before the end of the
year.
From corridor to floor: the role of excess reserves
Before 2008, the ECB, and most other major central banks, implemented monetary policy in a "corridor"
system. This means we provided just enough central bank reserves to meet banks' aggregate liquidity
needs stemming from net autonomous factors and minimum reserve requirements.
In matching supply and demand in aggregate terms, the ECB steered unsecured overnight rates to the
9 ]
middle of the corridor (Slide 4).[ As a result, excess liquidity was negligible. This framework was
successful in practice: the ECB was able to closely align overnight rates with the interest rate charged on
our weekly main refinancing operations (MRO) (Slide 5).
However, after 2008 periods of rising excess liquidity due to monetary policy operations repeatedly pushed
unsecured overnight rates towards the deposit facility rate (DFR), which is the floor of the interest rate
corridor. When we launched the APP in 2015 and excess liquidity started to grow rapidly, we effectively
moved from a "corridor" towards a "floor" system.
Conceptually, the supply curve shifted further and further to the right, now crossing the demand curve at
its flat, highly elastic part, where discrete changes in liquidity have very little effect on the level of
shortterm interest rates (Slide 6).
Balance sheet run-down will reverse this shift, progressively moving the supply curve back towards the
steep part of the demand curve. In the current situation, the large volume of excess reserves means that
we should still be at a significant distance from that point. Yet, uncertainty about the exact location of the
"kink" is very high.
One reason for this is that years of large excess reserves have blurred our understanding of banks'
underlying demand for liquidity. The aggregate level of reserves has been largely determined by the
quantity of asset purchases rather than by banks' liquidity choices.
Should the demand for reserves have shifted more fundamentally, then upward pressure on interest rates
may well start earlier than estimates of the historical relationship between the level of excess reserves and
market rates would suggest (Slide 7).
This is broadly what happened in the United States in the autumn of 2019, when interest rate volatility
spiked unexpectedly although the supply of reserves was still considerably above what banks had
10 ]
indicated in surveys as their lowest comfortable level.[
It is therefore prudent to start reviewing the options available to ensure that the ECB maintains control
over the level of short-term money market rates during the process of balance sheet normalisation.
Reserve demand has become larger and less predictable
The natural starting point for a discussion about the operational framework is to ask what has changed
since we last operated in an environment of balanced liquidity conditions.
The ability to effectively steer overnight rates in the pre-2008 corridor framework relied heavily on two
features.
The first was our ability to accurately predict the reserves needed to steer the operational target towards
the middle of the corridor. In the steep part of the demand curve, even small changes in the supply of, or
demand for, reserves can lead to large swings in interest rates.
The second feature was a well-functioning interbank market that distributed central bank reserves
efficiently across the euro area banking system. The standing facilities were not designed to be used on a
11 ]
regular basis but were supposed to accommodate unforeseen liquidity shocks.[
Over the past decade, however, the environment in which central banks operate has changed
fundamentally.
In the aftermath of the global financial crisis, large excess reserves and prevailing fragmentation have
considerably reduced the volume of reserves intermediated through the unsecured interbank market (Slide
8).
It is not clear whether the interbank market will recover once excess reserves become scarcer.
A structural decline in banks' risk tolerance may have permanently reduced the capacity of the euro area
interbank market to efficiently distribute reserves across banks all over the euro area. And while tighter
financial regulation has made our financial system safer and more resilient, it has made interbank lending
12 ]
more costly.[
Banks might also want to hold much higher liquidity buffers than in the past. The recent experience of
Sveriges Riksbank is a case in point.
In recent weeks, it regularly issued certificates amounting to the estimated liquidity surplus of the banking
system to steer the Swedish Krona short-term rate to the middle of the interest rate corridor.
However, banks often decided to hold on to about one fifth of excess reserves which they placed in the
deposit facility that pays a lower rate of remuneration, so that the short-term rate remained stuck to the
floor of the corridor (Slide 9).
This points to banks' strong preference for reserves, which may affect the ability of central banks to
13 ]
effectively steer short-term rates in a large corridor system, such as the one we had before 2008.[
There are two main reasons as to why banks may today wish to hold a higher level of excess reserves.
One relates to regulatory changes. The introduction of Basel III has resulted in a measurable increase in
the demand for high-quality liquid assets (HQLA) that banks need to hold to comply with the liquidity
14 ]
coverage ratio (LCR).[
Many euro area banks currently use excess reserves to meet regulatory requirements, especially in those
countries with high excess liquidity. For the euro area as a whole, excess reserves currently account for
60% of HQLA holdings (Slide 10).
The second factor relates to banks' precautionary behaviour in guarding against liquidity risks, as the
turbulent events in the past few weeks forcefully underline.
Overnight deposits at euro area banks have shown an upward trend in relation to banks' total deposits
15 ]
until about mid-2022 (Slide 11, left-hand side).[ As a result, the risk of withdrawals or portfolio
rebalancing has increased.
The rise in overnight deposits is in part a mechanical effect of asset purchases, which increase deposit
holdings of those selling bonds to the Eurosystem. It also reflects the long period of very low interest rates
that sharply reduced the opportunity costs of holding "money-like" claims.
Both of these effects can be expected to reverse as we remove monetary policy accommodation.
When we last increased interest rates, from 2005 until mid-2008, overnight deposits as a share of total
deposits fell by about seven percentage points as firms and households shifted savings into less fungible
term deposits that earn a higher rate of remuneration, a development that started only recently in the
current hiking cycle (Slide 11, right-hand side).
However, even if funding became more stable again over time, banks would be likely to want to hold larger
16 ]
liquidity buffers to meet potential outflows.[ And they would want to hold such buffers, at least in part, in
central bank reserves as these do not need to be liquidated and, unlike marketable safe and liquid assets,
are not subject to valuation changes.
The current environment vividly demonstrates that such valuation changes can be a source of instability
for banks and markets.
Steering interest rates when the demand for reserves is uncertain
These developments do not necessarily suggest that a return to the pre-2008 corridor framework is
undesirable or infeasible. After all, reserve demand may become more predictable over time and balance
sheet run-down will increase the availability of marketable HQLA which banks can use to comply with their
regulatory requirements.
But they do suggest that it may have become more difficult for central banks to correctly anticipate the
demand for reserves and hence to steer interest rates in a wide corridor, and that such steering would
entail a higher operational burden, both for the central bank and the banking system at large, with the
need for more frequent fine-tuning operations.
What, then, might be the alternatives to the pre-2008 corridor framework?
The recent experience of other major central banks suggests that policymakers have two broad options:
one is to formally adopt the current floor system by maintaining a sufficiently large bond portfolio on the
asset side; the other is to offer, either in a floor or a narrow-corridor framework, regular collateralised
lending operations that ensure that banks are able to maintain their desired level of reserve holdings as
balance sheet reduction proceeds.
While both options can be expected to have a similar capacity to maintain control over overnight interest
rates, they differ in their impact on the size and composition of the central bank's balance sheet, and in
their ability to deal with the idiosyncratic features of the Eurosystem.
More liquidity than needed, but not necessarily enough
17 ]
The first option is broadly how the Federal Reserve manages its balance sheet.[
The Federal Reserve aims to keep a sufficiently large buffer of excess reserves in the system so that the
effective federal funds rate - the rate at which banks and certain other institutions lend to each other -
trades close to the interest rate paid on reserve balances. This is the "floor" below which banks are better
off depositing with the Federal Reserve than lending in the market (Slide 12).
As not all financial market participants have access to the Federal Reserve's balance sheet, the floor
might be "leaky" - that is, overnight interest rates might trade below the floor as banks charge an
intermediation spread when borrowing reserves from non-banks that cannot directly store funds with the
18 ]
central bank.[
The bargaining power of non-banks can be increased by giving them access to the central banks' balance
sheet. This is what the Federal Reserve has achieved by establishing the overnight reverse repo facility
(ON RRP) which remunerates cash held by selected non-banks at rates slightly below the one paid to
19 ]
banks. This facility therefore sets a second floor on money market rates, reducing their volatility.[
Operating a floor system like that of the Federal Reserve has three key benefits: first, it maintains a higher
level of safe assets in the financial system; second, it is operationally simple, especially in a context where
it may be hard to accurately forecast the demand for reserves; and third, it can ensure instrument
robustness - that is, it can cater for large changes in the supply of reserves without diluting the interest
20 ]
rate signal.[
The degree of rate controllability under this framework depends, however, on a number of structural
features of the economy. These features, in turn, raise trade-offs, which may be larger in the euro area
than elsewhere.
One trade-off arises when central banks expand their balance sheets.
For example, the large increase in reserves in the wake of the PEPP and TLTROs has made the floor in
the euro area more and more leaky, with the euro area's benchmark interest rate, €STR, increasingly
decoupling from the DFR (Slide 13).
In these circumstances, interest rate control could be improved by broadening access to the deposit
facility, in ways similar to the ON RRP. Doing so could, however, affect the calculation of benchmark rates
in the euro area.
An ample reserve system disintermediates the unsecured money market, so that the computation of €STR
heavily relies on banks' trading with market participants who have no access to the Eurosystem's balance
sheet.
At the end of last year, for example, borrowing from non-banks accounted for nearly 90% of all unsecured
money market transactions (Slide 14). We would therefore need to find ways to safeguard continued
robustness of €STR, while, at the same time, avoiding destabilising shifts in funds between banks and
non-banks which could occur when broadening the access to our balance sheet.
A second trade-off arises when the supply of reserves declines.
Because the distribution of excess liquidity is often highly uneven across banks, reserve scarcity in
corners of the financial system might put upward pressure on interest rates even at high levels of
aggregate excess reserves.
In the euro area, for example, 25 banks alone currently hold over 40% of excess liquidity, with little
changes over time (Slide 15, left-hand side). Moreover, excess liquidity tends to be concentrated in
countries that are financial centres (Slide 15, right-hand side).
The uneven distribution of reserves within the system, together with the large uncertainty about banks'
underlying liquidity preferences, imply that central banks may have to keep a significant buffer of excess
reserves in the financial system to avoid unwarranted interest rate volatility.
To provide ample reserves in this framework, the central bank is required, by and large, to maintain a
significant outright "structural" bond portfolio. The Fed's approach is therefore called a "supply-driven" floor
system.
It constrains the choices of the central bank as to how to provide the reserves required to effectively steer
overnight rates towards the floor. An attempt to allow banks to choose their desired level of reserves, using
credit operations, could risk undersupplying the system as a whole, that is leaving it without the required
volume of excess reserves.
In principle, policymakers are free to choose the broad characteristics of such a structural bond portfolio.
For example, central banks could adjust the asset composition according to their secondary objectives,
21 ]
such as alignment with the Paris Agreement.[
Moreover, the average weighted maturity could be kept short to limit the impact of the portfolio on the
monetary policy stance or to reduce central banks' exposure to duration risk.
In the euro area, however, there are two additional considerations relevant for the assessment of whether
a large bond portfolio is desirable or not.
One is that the lack of a consolidated public sector balance sheet raises more fundamental concerns
about monetary and fiscal interactions in a currency union with sovereign member states. These concerns
may potentially undermine the credibility and independence of the central bank.
If central banks need to raise interest rates sharply to protect price stability, this implies significant risk
22 ]
exposures for central banks and may have implications for government budgets.[ In addition, large
central bank's sovereign bond holdings may distort the price information of underlying risks in the euro
area.
Second, a large bond portfolio may affect liquidity conditions in financial markets.
In recent years, the Eurosystem's footprint in financial markets has contributed to a significant "scarcity
premium" that market participants must pay to obtain bonds bought under our asset purchase
programmes (Slide 16, left-hand side).
Such scarcity effects can put the smooth functioning of financial markets at risk, especially when the
demand for safe assets increases in periods of stress. These effects tend to be larger in the euro area
than in the United States, given the euro area's substantially lower volume of outstanding highly-rated and
liquid bonds (Slide 16, right-hand side).
Central banks have tools to partly alleviate such distortionary effects. The Eurosystem's securities lending
facility, for example, channels bonds bought under our purchase programmes back into the market,
improving liquidity.
But the larger the portfolio, the less likely it is that liquidity conditions remain unaffected. This could risk
undermining our obligation to act in accordance with the principle of an open market economy where
23 ]
prices and quantities are determined by competitive market forces.[
Giving banks the liquidity they demand
The second approach has the potential to alleviate some of these trade-offs by allowing banks themselves
to determine the amount of liquidity they want to hold.
24 ]
This is broadly the approach the Bank of England first announced in 2019 and implemented in 2022.[
Under this approach, the central bank offers regular collateralised lending operations to ensure that any
shortfall in banks' demand for reserves is replenished as quantitative tightening proceeds (Slide 17). That
is why the Bank of England's approach is referred to as a "demand-driven" floor system.
In doing so, the Bank of England can unwind its bond holdings without needing to know banks' demand for
excess reserves, nor the point at which the supply curve will start to cross the steep part of the demand
curve.
The Bank of England currently offers reserves through short-term repo operations at the same rate that it
pays to banks depositing reserves. Using the same rate for providing and remunerating reserves ensures
that money market rates will trade closely to the policy rate at every level of excess reserves.
By its nature, such a system shares some of the benefits and costs of a supply-driven framework.
While it is operationally simple and robust to large changes in reserves, it may in some market structures
also be prone to a leaky floor when excess reserves expand measurably in response to asset purchases
25 ]
or long-term credit operations.[
In addition, a demand-driven framework has two specific characteristics.
One is that its success in steering interest rates critically depends on banks' willingness to regularly tap the
lending operations as and when they begin to experience shortfalls relative to their reserves demand.
Stigma may prevent banks from borrowing the amount needed to stabilise interest rates at the intended
level.
In the United Kingdom, this risk has been tackled in three ways: first, through non-penal pricing; second,
by communicating clearly that this is a business-as-usual monetary policy operation; and third, through a
clear statement from the Prudential Regulation Authority that it would judge usage of the facility to be
routine participation in money markets.
A second characteristic is a potential "coordination" problem: individually, banks may have incentives to be
economical in their borrowing of reserves, which could expose them to unexpected liquidity shocks
inbetween liquidity providing operations.
So, in the absence of an efficient interbank market, there must be alternative facilities for banks to source
liquidity at short notice should they need it. The Bank of England offers a range of liquidity facilities which
allow firms to access reliable supplies of liquidity at a predictable cost.
Provided these issues can be resolved, the Bank of England's approach has a number of benefits that
may be particularly relevant for a large and heterogeneous currency area like the euro area.
One is that it may provide better insurance against potential fragmentation shocks.
Under a demand-driven framework, the distribution of reserves would be expected to be more even than
in a supply-driven floor system, where excess reserves are often very concentrated (Slide 15). A more
balanced reserve distribution could strengthen the resilience of the currency union.
A second benefit of a demand-driven framework is that it offers more flexibility on how the central bank
provides reserves: because only the marginal unit of reserves to the banking system must be supplied via
credit operations, the central bank may still choose to hold an outright bond portfolio, for example to satisfy
the economy's structural liquidity needs.
This portfolio could be appreciably smaller than what may be required to steer interest rates in a
supplydriven framework. It could nevertheless be useful in reducing the operational burden and in avoiding
26 ]
encumbering large volumes of collateral.[
A third benefit is that the Bank of England's approach may potentially lead to a leaner balance sheet
depending on banks' demand for reserves, which will depend, among other things, on two factors.
One is central banks' collateral framework: all else being equal, the easier it is for counterparties to turn
non-HQLA into highly liquid reserves, the larger the central bank's balance sheet will be.
The other factor is the relative return on reserves. For a long time, reserves in the euro area have been an
attractive option for complying with HQLA requirements. They persistently generated higher returns than
safe and liquid bonds (Slide 18).
The rise in policy rates has made the relative returns on reserves much more volatile. In recent months, it
was often more profitable for banks to hold marketable HQLA. This was also typically the norm when
excess reserves were scarce.
A final and important benefit of a demand-driven framework is that it allows the central bank to gradually
learn about banks' underlying liquidity preferences.
This offers some flexibility for adjustment in the future. For example, although the Bank of England
currently operates a floor framework, this is not a necessary feature for the success of a demand-driven
system.
Sveriges Riksbank, for example, operates in a narrow corridor system where the lending rate and the
deposit facility rate are set at a spread of 10 basis points above and below the policy rate. This spread
was chosen to encourage counterparties to find market solutions for their funding needs rather than
27 ]
making recourse to the central bank.[
If the corridor is sufficiently narrow, the implied rate volatility from fluctuations in aggregate excess
reserves may not be a first-order concern. Indeed, the experience of the Eurosystem in 2014, when
excess liquidity was declining, suggests that even relatively large fluctuations in overnight rates might not
affect broader policy transmission (Slide 19).
Conclusion
To conclude, my remarks today have highlighted that the decision which policy implementation framework
the ECB should choose for the future involves many complex issues. Ultimately, our obligation to act in
line with the principle of an open market economy implies that, in the steady state, the size of our balance
sheet should only be as large as necessary to ensure sufficient liquidity provision and effectively steer
short-term interest rates towards levels that are consistent with price stability over the medium term.
Thank you.
Annexes
27 March 2023
Slides
ENGLISH

1.
I would like to thank staff from the ECB's Directorate General Market Operations for their contributions to
this speech. For the rationale and market impact of quantitative tightening, see Schnabel, I. (2023),
" Quantitative tightening: rationale and market impact ", speech at the Money Market Contact Group
meeting, Frankfurt am Main, 2 March.
2.
Before 2021, the ECB defined price stability as Harmonised Index of Consumer Prices (HICP) inflation
being below, but close to 2% in the medium term. As part of our strategy review in 2021, the Governing
Council decided that price stability is best maintained by aiming for 2% inflation over the medium term.
3.
See Schnabel, I. (2020), " The ECB's response to the COVID-19 pandemic ", remarks at a 24-Hour Global
Webinar co-organised by the SAFE Policy Center on "The COVID-19 Crisis and Its Aftermath: Corporate
Governance Implications and Policy Challenges", Frankfurt am Main, 16 April; and Schnabel, I. (2020),
" The ECB's monetary policy during the coronavirus crisis - necessary, suitable and proportionate ", speech
at the Petersberger Sommerdialog, 27 June.
4.
Full reinvestment under the PEPP is currently expected to continue until the end of 2024.
5.
The future path of our APP and PEPP holdings reflect the results of our survey of monetary analysts
(SMA).
6.
Autonomous factors also include net foreign assets and a miscellaneous category that includes items in
the course of settlement (net float).
7.
The Eurosystem recently took measures that provide incentives for a gradual and orderly reduction of
government deposits.
8.
The introduction of a central bank digital currency could have implications for the size of the balance
sheet. See, for example, Armas, A. and Singh, M. (2022), "Digital Money and Central Banks Balance
Sheet", IMF Working Paper, No 206.
9.
The corridor consisted of a marginal lending facility which provided a daily backstop for banks facing
unanticipated liquidity shocks and a deposit facility rate. In 2003, the Governing Council decided to reduce
the maturity of the MROs from two weeks to one week and to adjust the timing of the reserve maintenance
period. See ECB (2003), " Measures to improve the efficiency of the operational framework for monetary
policy ", 23 January.
10.
Anbil et al., (2020), "What Happened in Money Markets in September 2019?", FEDS Notes, 27 February;
and Federal Reserve System (2019), August 2019 Senior Financial Officer Survey.
11.
Banks were required to fulfil their reserve requirements on average during the maintenance period. This
reduced the need for recourse to the standing facilities during the maintenance period. However, by
design the facilities were systematically and intensely used on the last day of each maintenance period if
there was an aggregate shortage or excess of reserves.
12.
See Kim, K., Martin, A. and Nosal, E. (2020), "Can the U.S. Interbank Market Be Revived?", Journal of
Money, Credit and Banking, Vol. 52(7), pp. 1645-89; and Afonso, G., Armenter, R. and Lester, B. (2019),
"A Model of the Federal Funds Market: Yesterday, Today, and Tomorrow", Review of Economic Dynamics,
Vol. 33, pp. 177-204. For a long time, an efficient interbank market was associated with hopes of
increased financial stability through counterparty monitoring (see, for example, Rochet, J-C. and Tirole, J.
(1996), "Interbank Lending and Systemic Risk", Journal of Money, Credit and Banking, Vol. 28(4), Part 2:
Payment Systems Research and Public Policy Risk, Efficiency, and Innovation, pp. 733-762). However,
the global financial crisis may have permanently extinguished these hopes, probably because banks do
not have strong incentives to monitor the solvency of their counterparties when most borrowing activity
takes place overnight.
13.
Before 2008, the width of the corridor in the Eurosystem was two percentage points.
14.
Changes in over-the-counter (OTC) derivatives regulations, leading to requirements for central clearing,
and margin requirements for uncleared derivatives, have also driven increased demand for HQLA.
15.
See also Acharya, V.V. et al. (2022), "Liquidity Dependence: Why Shrinking Central Bank Balance Sheets
is an Uphill Task", paper presented at the Federal Reserve Bank of Kansas City's Jackson Hole Economic
Symposium, August.
16.
For the role of deposits in reserve demand, see Lopez-Salido, D. and Vissing-Jorgensen. A. (2023),
"Reserve Demand, Interest Rate Control, and Quantitative Tightening", mimeo.
17.
See Board of Governors of the Federal Reserve System (2019), " Statement Regarding Monetary Policy
Implementation and Balance Sheet Normalization ", 30 January; and Zobel, P. (2022), "The Ample
Reserves Framework and Balance Sheet Reduction: Perspective from the Open Market Desk", remarks at
the Cato Institute's 40th Annual Monetary Conference, 8 September.
18.
This spread compensates banks for the overhead and balance sheet costs of liquidity storage services but
may also include an excess spread reflecting the pricing power that banks enjoy because of their
exclusive access to the central bank balance sheet.
19.
The Federal Reserve also has liquidity backstop facilities - the discount window facility and the Standing
Repo Facility - which are priced above the market rate to prevent sudden rate spikes arising from
demand-supply mismatches for which the chosen buffer may prove to be insufficient.
20.
For the role of reserves in contributing to financial stability, see Greenwood et al. (2016), "The Federal
Reserve's Balance Sheet as a Financial-Stability Tool", prepared for the Federal Reserve Bank of Kansas
City's 2016 Economic Policy Symposium, Jackson Hole.
21.
Schnabel, I. (2023), " Monetary policy tightening and the green transition ", speech at the International
Symposium on Central Bank Independence, Sveriges Riksbank, Stockholm, 10 January.
22.
See, for example, Cavallo, M. et al. (2019), "Fiscal Implications of the Federal Reserve's Balance Sheet
Normalization", International Journal of Central Banking, Issue 61, pp. 255-306.
23.
See Article 119(2) and Article 127(1) of the Treaty on the Functioning of the European Union (TFEU).
24.
Hauser, A. (2019), "Wait