Expansion and Contraction of Central Bank Balance Sheets: Implications for Commercial Banks

Reserves and institutional asset managers have to constantly monitor and assess risk-return trade-offs in the markets where they invest. Among the various tools and indicators that they employ, understanding the balance sheet strength of commercial banks is indispensable. This is because of the role of banks as credit intermediaries for financing economic activity and their important function in the payment and market infrastructures for financial transactions. As central banks have embarked on many, new unconventional monetary policy measures, it is important to ask what the impact on commercial banks is, and whether this enhances or inhibits their traditional credit intermediary role. This chapter examines these questions and considers what hidden risks might be building up as central banks accumulate assets.