- Quantitative normalization is proceeding smoothly, with strong liquidity positions of banks and abundant excess liquidity
- Fixed-rate full allotment in standard refinancing operations ensures that liquidity is always available when banks need it
- Operational framework suggests a sequence for how to supply reserves in the future, with a persistent take-up of standard refinancing operations to precede the launch of structural operations, starting with longer-term refinancing operations and followed by a structural securities portfolio
- Considerations about stance neutrality, policy space and financial soundness suggest tilting the new structural securities portfolio towards shorter-term securities
Although balance sheet normalization still has a long way to go, it is worth reflecting on what the Eurosystem balance sheet should look like in the future, said Isabel Schnabel, member of the Executive Board of the ECB, in a recent speech.
“Our operational framework, which we published in March 2024, implies that the size of [the ECB’s] balance sheet will become more responsive to banks’ liquidity demand, and its composition more heavily shaped by collateralized lending operations,” she said.
She explained that the term quantitative normalization (QN) better captures the mechanics and intent of the current run-off of ECB policy portfolios, as the central bank gradually removes the residual monetary stimulus from the system.
“QN, however, is more than balance sheet normalization – it is a transformative moment that raises important questions. What role do central bank reserves play in the post-pandemic world? What mix of assets and liabilities best supports the effective implementation of monetary policy? And how will these choices affect market functioning? These are not merely technical questions; they are strategic choices that will influence how monetary policy will operate in the decade ahead,” she said.