Note: the bulk of French public debt held by the Eurosystem is held by the Banque de France, and the remaining amount by the ECB.
Another possible limit is the risk of loss for central banks in the event of a deterioration in the creditworthiness of the issuers of the securities held, or that of institutions benefiting from bank refinancing. However, this risk is kept under tight control: i) the scope of the purchase programmes is restricted to assets deemed to be low-risk; ii) in practice, securities are held until maturity, thus shielding the Eurosystem from the risks related to bond price fluctuations; and iii) the refinancing operations are subject to a collateral policy. Furthermore, a possible contingency would be a rise in key interest rates, which could lower profits or even cause losses for the Eurosystem due to its immediate impact on the remuneration of liabilities (reserves), while the Eurosystem holds long-term assets with fixed rates (securities held to maturity and long-term refinancing). To face this risk of loss, central banks make provisions. As a last resort, they could be recapitalised by governments. In principle, central banks could even temporarily operate with negative equity, but in practice this would undermine their credibility and independence and could trigger a loss of confidence in the currency and ultimately uncontrolled inflation (Barthelemy and penalver (2020)).
What is the outlook?
The size of the Eurosystem's balance sheet is likely to remain at a high level for the foreseeable future. On the one hand, a significant share of the assets purchased are long-term securities. On the other, the Eurosystem has announced the reinvestment of principal payments from maturing securities, at least until end-2023 in the case of the PEPP, and as long as necessary to maintain a high degree of monetary support in the case of the APP. In the longer term, however, the Eurosystem's balance sheet is expected to stabilise and then gradually decline once inflation has lastingly returned to close to its target. Moreover, a large balance sheet would not prevent the central bank from raising key interest rates if it deemed it necessary: it would ensure their transmission to market rates via the interest rates remunerating commercial banks’ excess reserves, which remains a floor for the interbank interest rate despite the abundance of liquidity.
Without prejudging the average level of the balance sheet that is desirable in the long run, the fact remains that "balance sheet policies" have found their place in central banks’ toolbox. If the room for downward manoeuvre on interest rates remains limited in the future, adjustments to the size of balance sheets will continue to be a useful tool for responding to possible negative shocks to inflation (see CGFS (Potter and Smets, 2019), or Bernanke (2020)).