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Speech by Benoît Cœuré, Member of the Executive Board of the ECB, at the ECB workshop on money markets, monetary policy implementation and central bank balance sheets.

Frankfurt am Main, 12 November 2019

Since the outbreak of the global financial crisis, central banks have injected a huge amount of liquidity into the financial system.¹ The monetary policy assets on the Eurosystem’s consolidated balance sheet, for example, have expanded from around €0.5 trillion on the eve of the crisis in July 2008 to nearly €3.3 trillion at the end of September this year.

Not all of the expansion in central bank balance sheets reflects direct monetary policy actions, however. Part of it relates to regulatory factors, as I will explain shortly in more detail. And part of it relates to autonomous factors, such as the steady increase in the demand for banknotes.

Yet, changes in the way we operate and implement monetary policy – in our case, the fixed-rate full allotment at our main refinancing operations, (targeted) long-term refinancing operations and our asset purchase programme – have resulted in considerably more liquidity being injected into the financial system than is required by banks to meet their immediate liquidity needs.

These excess liquidity holdings were first a sign of uncertainty and mistrust, and then of a dysfunctional money market. As a result, central bank operations substituted for market-based intermediation in times of crisis.

Today, large excess reserve holdings are, by and large, a reflection of the accommodative monetary policy that central banks have conducted in recent years, and that many, including the ECB, are still conducting today in view of stubbornly low inflation rates. You can see this on my first slide. Excess liquidity increased as we rolled out our unconventional policy measures.

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