banks in the major countries have expanded very significantly, in some cases approaching or even surpassing their war - time peaks ( graph 1 ). further expansion may yet occur. graph 1 it is no criticism of these actions – taken as they have been under the most pressing of circumstances – to observe that they raise some very important and difficult questions for central banks. there is discomfort in some quarters that central banks appear to be exercising an unprecedented degree of discretion, introducing new policies yielding uncertain benefits, and possible costs. one obvious consideration is that central banks, in managing their own balance sheets, need to assess and manage risk across a wider and much larger pool of assets. gone are the comfortable days of holding a modest portfolio of bonds issued by the home government that were seen as of undoubted credit quality. central bank portfolios today have more risk. to date in the major countries, this has worked well in the sense that long - term yields on the core portfolios have come down to the lowest levels in half a century or more. large profits have been remitted to governments. but at some point, those yields will surely have to rise. bis central bankers ’ speeches of course large central bank balance sheets carrying sizeable risk is hardly news around asia. once again, the bank of thailand has made an excellent contribution to the international discussion here, having recently held a joint conference with the bis on central bank balance sheets and the challenges ahead. 10 the difference is that in asia the risks arise from holdings of foreign - currency assets which have been accumulated as a result of exchange - rate management. there is obviously valuation risk on such holdings. there is also often a negative carry on such assets since yields on the asian domestic obligations which effectively fund foreign holdings are typically higher than those in the major countries. in effect the citizens of asia continue to provide, through their official reserves, very large loans to major country governments at yields below those which could be earned by deploying that capital at home in the region. for the major countries a further dimension to what is happening is the blurring of the distinction between monetary and fiscal policy. granted, central banks are not directly purchasing government debt at issue. but the size of secondary market purchases, and the share of the debt stock held by some central banks, are sufficiently large that it can only be concluded that central bank purchases are materially alleviating the market constraint on government borrowing. at the very least this is lowering debt service costs, and it may also condition

##326. pdf >. a further question is whether significant parts of private markets for which central banks are de facto a more or less complete substitute today will actually resume when central banks seek to step back, or whether those market capacities will have atrophied. this is something the bank of japan has long worried about – since it has been involved in qe for more than a decade. it will also be relevant in european inter - bank markets and probably elsewhere. of course some may not mourn the loss of such markets, but that would be short - sighted. bis central bankers ’ speeches too much. they cannot combat the effects of population aging or drive the innovation that raises productivity and creates new markets. nor can they, or should they, put themselves in the position of deciding what real resource transfers should take place between countries in a currency union. one fears, in short, that while the central banks have been centre stage – rightly in many ways – in the early responses to the crisis, and in buying time for other adjustments by taking bold initiatives over the past couple of years, the limits of what they can do may become more apparent in the years ahead. a key task for central banks is to try to communicate these limits, all the while doing what they can to sustain confidence that solutions can in fact be found and pointing out from where they might come. challenges with spillovers talking about the challenges associated with large balance - sheet activities leads naturally into a discussion about international spillovers. in one sense, this is not a new issue. it has been a cause of anxiety and disagreement since the latter days of the bretton woods agreement at least. the remark attributed to the then secretary of the us treasury in regard to european concerns about the weakness of the us dollar in the 1970s of “ it's our currency, but your problem ” was perhaps emblematic of the spillovers of that time. there have been other episodes since. 13 in a much earlier time there was, of course, the “ beggar thy neighbour ” period of the 1930s – something which carries cogent lessons for current circumstances. in recent years, as interest rates across a number of major jurisdictions have fallen towards zero and as central bank balance - sheet measures have increased, these developments have been seen as contributing to cross - border flows of capital in search of higher returns. the extent of such spillovers is still in dispute. and, to the extent that they are material, some argue that a world in