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Bank for International Settlements highlights massive growth of central banks' balance sheets, wary about impact of them ending easy monetary policy

Bank for International Settlements highlights massive growth of central banks' balance sheets, wary about impact of them ending easy monetary policy

By Gareth Vaughan

The value of assets held by the world's central banks have doubled over the past six years to be worth about US$20 trillion, the equivalent of about 30% of global Gross Domestic Product (GDP), according to the Bank for International Settlements (BIS).

BIS, the central banks' bank, issued its 83rd annual report over the weekend. In it BIS highlights looming dangers as "overburdened" central banks, heavily relied upon to stimulate economies over recent years through "very accommodative" monetary policy,  look to unwind their unprecedented positions.

"There are growing concerns at this juncture about the effectiveness of these (accommodative) policies and their negative side effects," BIS says. "Monetary accommodation can only be as effective as the balance sheet, fiscal and structural policies that accompany it."

BIS notes balance sheet build up has been strongest in emerging Asian economies, being China, Chinese Taipei, Hong Kong SAR, India, Indonesia, Korea, Malaysia, the Philippines, Singapore and Thailand. Across these countries central bank assets correspond to more than 50% of GDP, although this percentage is unchanged since late 2007  given GDP in the region has also grown strongly.

Central banks in these countries have mainly grown their balance sheets by accumulating foreign exchange reserves. At the end of 2012, foreign reserve holdings in these emerging Asian countries amounted to more than US$5 trillion, equivalent to about half the world's total stock of foreign reserves.

Meanwhile, in Switzerland, the Swiss National Bank is holding assets equivalent to 85% of GDP after sharply increasing its foreign reserves to about US$470 billion by the end of 2012 in defence of its exchange rate floor against the euro. Here in New Zealand, the Reserve Bank's total assets rose about $5.6 billion between 2007 and 2012 to $26.7 billion, which is the equivalent of about 13% of New Zealand's GDP.

Central bank total assets

1 Australia, Canada, Denmark, New Zealand, Norway and Sweden.

2 China, Chinese Taipei, Hong Kong SAR, India, Indonesia, Korea, Malaysia, the Philippines, Singapore and Thailand.

3 Argentina, Brazil, Chile, Colombia, the Czech Republic, Hungary, Mexico, Peru, Poland, Russia, Saudi Arabia, South Africa and Turkey.

Sources: IMF, International Financial Statistics; Datastream; national data.

Exit challenges

BIS notes in the years ahead exiting these "extraordinarily accommodative policy stances" will raise significant challenges for central banks.

In the United States, for example, the Federal Reserve's quantitative easing (QE) programme currently sees it buy US$40 billion worth of mortgage-backed securities per month, and US$45 billion worth of longer-term Treasury securities a month.  The Fed's benchmark interest rates, the federal funds rate, remains between 0% and 0.25% where it has been since December 2008. The Fed's current QE programme is its third over the past few years, with these having seen its balance sheet rise to a record high of US$3.41 trillion.

Last week Chairman Ben Bernanke said the Fed might start tapering off its unprecedented QE programme later this year.

BIS notes that in exiting their accommodative monetary policies the world's big central banks, ultimately including the Bank of England, European Central Bank and Bank of Japan as well as the Fed, will need to strike the right balance between the risks of exiting prematurely and the risks associated with delaying exit further.

"While the former are well understood, it is important not to be complacent about the latter just because they have not yet materialised. And central banks will need to ensure  that exit proceeds as smoothly as possible.'

Furthermore, BIS says, each exit will need to be engineered in an environment of high levels of debt, much of which has been issued at record low interest rates.

"With interest rates having been extraordinarily low for so long, the high levels of debt together with the special lending schemes in place are likely to strengthen indebted sectors' reaction, especially if their expectations and patterns of behaviour have become accustomed to this unusual environment," BIS says.

Interest rates too low for too long can create distortions

The annual report points out the Central Bank of Norway has recently amended its benchmark policy model to capture the notion that interest rates that are too low for too long can create distortions over time.

BIS points out that, as central bank balance sheet size and scope is unprecedented, so will the exit be.

"This magnifies the uncertainties involved and the risk that it will not be smooth. Moreover the longer the current accommodative conditions persist, the bigger the exit challenges become. This puts central banks in a very uncomfortable position and highlights the need to address the economies' underlying balance sheet and structural problems without delay."

"The crisis has also reinforced the view that price stability is not enough. That said, efforts to integrate financial stability concerns into monetary policy frameworks are still a challenging work in progress. And at the same time, in a more globalised world, central banks will increasingly need to factor in global policy spillovers."

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Thanks as usual.

Here in New Zealand, the Reserve Bank's total assets rose about $5.6 billion between 2007 and 2012 to $26.7 billion, which is the equivalent of about 13% of New Zealand's GDP.

Am pleased to see we have printed more than zero, and indeed would have preferred we printed a good deal more while the exchange rate was clearly overvalued, as Mr Wheeler frequently now says.

When did we do the printing, and what have we bought with it, do you know? 

As the article notes the global unwinding will be interesting to watch. I suspect it will be relatively slow, and that interest rates wil remain pretty low for some years.



You may be right, (though I don't think so) but where did the Reserve Bank get the NZD from in the first place, if they didn't just type a few strokes on a keyboard?

When the Swiss have done the same thing with hundreds of billions of Swiss Francs, do you not consider that printing either? Am happy to call it something else, as I fully understand the term printing gets people emotional, although I also get frustrated that pretending to call it something else seems childish. The commercial banks printing money for example seems perfectly okay with politicians and the citizenry, but the government/RBNZ overtly doing it, is sneered and laughed at by Key and Joyce- even though it seems to me they have been.



Gents, I only included the RBNZ total assets figures to provide some context compared with some of the world's other central banks. Over the same time period , 2007 to 2012, the RBNZ's total liabilities rose $4.6 billion, or about 24%, to $24.1 billion.

In its annual report the RBNZ says: "The size and composition of the Bank’s balance sheet is primarily determined by the public’s demand for notes and coin, the level of deposits placed with the Bank by the New Zealand government, the amount of cash held at the Bank to facilitate daily interbank payments, and the amount of foreign reserves the Bank holds to maintain its foreign reserves intervention capacity and the means of funding these reserves."



Good context it was too, thanks, although I confess to probably not fully understanding what is going on; and given it is all measured in multiple billions of dollars, it seems important to me.

A quick look here, NZRB reserves appear to decline, suggests that total Reserve Bank assets seemed to decline between 2007 and 2012. That seems true whether looking just at Foreign Assets, Reserve Bank only assets, or Reserve Bank and Treasury combined. In fact at end April 2013 the total assets appear to have suddenly fallen off a cliff and are the lowest since a blip in July 2009, and before that, a more common low from July 2006 and earlier. I am clearly looking at a different place to you, Gareth, so may not be comparing apples and apples.

In terms of the matching liabilities on their balance sheet, is that a debt to say investors in NZ government bonds or to the main commercial banks, or is that a debt to themselves in some way (and so not a debt at all really) in a similar way to some of the QE in other countries? 


The figures I used come from the RBNZ's annual reports.


The balance the BIS's idelogocal burp,

"Part of what makes the report so awesome is the way that it trots out every discredited argument for austerity, with not a hint of acknowledgement that these arguments have been researched and refuted at length."…

So really we have as PK says dead enders in dark suits, who seem determined to join in with the right wing pollies doing austerity and send us into a depression.