the equivalent ois rate has remained broadly stable over the past two years ( slide 13, left - hand side ). monetary policy has an impact on intermediaries ’ risk - bearing capacity however, changes in the ois term premium are not able to fully explain the gap between ten - year yields and the expected future path of short - term interest rates in all parts of the euro area. issuers with lower credit ratings, in particular, saw their spreads over the ois increase, albeit to a limited degree in most cases ( slide 13, right - hand side ). a rise in spreads, however, would be expected if qt was a reversal of qe. this can be seen when considering one of the main transmission channels of asset purchases : the portfolio rebalancing channel. this channel works in two complementary ways. one way is that asset purchases lower the yields on benchmark government bonds and thus induce a broad range of investors to shift their investments into riskier assets. the other is that by reducing the amount of duration risk held by leveraged financial intermediaries, asset purchases create balance sheet capacity to hold other riskier assets. in the euro area, portfolio rebalancing has been powerful, with risk premia on bonds issued by lower - rated sovereigns and firms falling measurably because of our purchases. [ 22 ] prospects of qt might have led to a partial reversal of these effects, in particular after a long period of low interest rates. in practice, however, it is inherently difficult to distinguish such qt effects from the more direct impact of a rise in the risk - free rate on the country - specific risk premium. to the extent that sovereign bonds are risky, their yields have to rise by more than the rise in the risk - free rate to compensate investors for the increase in credit risk. [ 24 ] the larger public debt is as a share of gdp, the stronger this effect should be. the empirical literature suggests, however, that there is no mechanical link between changes in the riskfree rate and credit risk premia. the relationship is often non - linear and highly time and state - dependent. the euro area ’ s experience over the past 15 months fits this pattern. the correlation between policy rate expectations in one year ’ s time and the spread between the ten - year gdp - weighted yield over the ois has been far from perfect since december 2021 ( slide 14, left - hand side ). there have been persistent periods

reason relates to the ecb ’ s operational framework. after the start of the app in 2015, we de facto moved from a corridor system for steering short - term market rates towards a floor system, as the large increase in excess liquidity caused money market rates to converge to the rate applied by the eurosystem to its deposit facility ( the deposit facility rate, or dfr ; slide 2 ). in the ongoing review of our operational framework, we are analysing whether in the future we will operate under a floor or a corridor system. we hope to conclude this review by the end of the year. one important element in our discussion is the amount of central bank reserves required to effectively steer short - term interest rates in either a floor or a corridor system. this amount informs our decisionmaking as to when balance sheet normalisation might need to be halted. structural and regulatory changes have made estimating the demand for reserves more challenging than before the global financial crisis. however, our current estimates suggest that the amount of central bank reserves currently held by the banking sector exceeds, by a significant margin, the level necessary to steer short - term market rates close to our key policy rate even under a floor system. this implies that the current size of our balance sheet is larger than necessary to effectively implement our monetary policy stance. as such, maintaining a large bond portfolio absorbs valuable policy space that may be needed if policy rates were to become constrained again by the effective lower bound. shrinking the balance sheet, to the extent possible, is therefore both prudent and efficient. mitigating negative side effects of a large balance sheet the second reason for reducing the app portfolio is related to the side effects of running a large balance sheet. it is well documented that bond purchases can cause asset price valuations in financial and real estate markets to diverge from their economic fundamentals, thus raising both financial stability risks and wealth inequality. maintaining too large a balance sheet may also have undesirable side effects. one is that it could jeopardise central bank ’ s credibility by giving rise to accusations of financial and fiscal dominance. a second side effect is that maintaining a larger balance sheet than necessary increases the eurosystem ’ s exposure to credit and duration risk. the probability and extent of net losses are significantly higher the larger the amount of long - term fixed - rate assets the central bank holds on its balance sheet. a third side effect relates to the functioning of financial markets. the app, together with