Since the global financial crisis, the size of central bank balance sheets has varied widely, both over time and across countries. Balance sheet size has major implications in many domains, including the operation of the payments system, the transmission of monetary policy and the cost of public debt.
by Masatoshi Ando and Álvaro Pina, OECD Economics Department
The value of total assets and liabilities of many central banks in advanced economies has varied widely since the global financial crisis (see Figure 1). Following the global financial crisis quantitative easing (QE), with the large-scale purchase of securities (mainly government bonds), led to a significant increase in the size of the balance sheets of the Federal Reserve and the Bank of England from 2009, and of other central banks, such as the European Central Bank (ECB), in subsequent years. During the pandemic, these and other central banks resorted again to QE to address strains in financial markets and provide support to economic activity. At their post-pandemic peaks, balance sheets were (relative to GDP) 3 to 9 times larger than in 2007 and displayed substantial cross-country variation, ranging from 25% of GDP in Canada to around 130% in Japan.
Central banks began quantitative tightening (QT), the downsizing of bond holdings, in 2022-23 (the Federal Reserve had previously done this in 2017-19). In several economies the size of balance sheets relative to GDP has now returned to or is close to pre-pandemic levels. Against this background, some central banks have brought QT to a halt while others are still pursuing it, and a lively debate has emerged about the appropriate size and composition of central bank balance sheets in the longer run (Bailey, 2024; Schnabel, 2025; Logan et al., 2026).
The balance sheet of the central banks which conducted QE is mainly composed of government bonds on the asset side and reserves on the liability side. Thus, as discussed in the latest OECD Economic Outlook (OECD, 2026a), the decision about the appropriate balance sheet size essentially depends on an assessment of the trade-offs that arise as bond holdings and reserves increase or decrease. These trade-offs can evolve over time, depending on the wider economic situation and on financial market conditions.
Figure 1. Quantitative easing and quantitative tightening have been the main drivers of changes in central bank balance sheet size
Note: Only major components of the central bank balance sheets are shown. Assets are displayed as positive and liabilities as negative. For the United States, RRP stands for Reverse Repurchase Agreements. For the euro area, data refer to the actual membership at each point in time, reserves include the amount of deposit facility, and longer-term refinancing operations (LTROs) include targeted longer-term refinancing operations (TLTROs) and pandemic emergency longer-term refinancing operations (PELTROs). For the United Kingdom, securities are proxied by loans from the Bank of England to the Asset Purchase Facility (APF), net of Term Funding Scheme (TFS) drawings.
Source: OECD Economic Outlook 119 database; Bank of Canada; Bank of England; Bank of Japan; Board of Governors of the Federal Reserve System; European Central Bank; Eurostat; Reserve Bank of Australia; Office for National Statistics; and OECD calculations.
Larger or smaller? Trade-offs arise for both bond holdings and reserves
One argument for smaller balance sheets and lower central bank government bond holdings is that this would reduce price distortions in sovereign debt markets, leading to a more efficient allocation of resources. Furthermore, large holdings of government bonds can complicate central bank communication, particularly if they are perceived to constrain monetary policy due to the risk of fiscal dominance. Returning to lower bond holdings also preserves policy space to reintroduce QE as a response to future crises, if needed (Anderson et al., 2026).
However, it is uncertain that central banks can reduce their holdings of government bonds significantly at a time of large budget deficits and substantial debt issuance. Any reduction in central bank holdings requires greater public debt absorption by private sector investors, who tend to be more price‑sensitive and are sometimes highly leveraged. This entails the risk of higher yields and greater volatility in sovereign bond markets at times of stress (Ando et al., 2026; OECD, 2026b). In the event of serious bond market volatility, central banks could need to temporarily resume or enhance securities purchases to help preserve financial stability, as in the United Kingdom in September-October 2022. In a currency union, tensions in sovereign debt markets could also lead to financial fragmentation. This would threaten the smooth and effective transmission of monetary policy across the whole area and potentially require central bank intervention (Cipollone, 2025).
Important policy trade-offs also apply to the liability side of central bank balance sheets. From the perspective of the private sector, reserves held at the central bank are safe, and liquid assets which serve as an essential means of settlement. Although a reduction in the amount of reserves could lead to better functioning of money markets, with a pickup in trading volumes, there is a risk that liquidity shortages in money markets could raise interest rate volatility at certain junctures, forcing the central bank to intervene. Events in September 2019 in the United States are an example, when the repo rate spiked sharply amid ongoing QT at the same time as high tax payments and Treasury settlements.
Ensuring that balance sheet reductions do not lead to liquidity stress is difficult given uncertainty about the demand for reserves. There is a broad consensus that demand for reserves has increased over the past two decades, partly due to changes in financial regulation (Anderson et al., 2026; BIS, 2025). For instance, reserves have come to be regarded as the prime asset for compliance with liquidity requirements. In addition, financial institutions may hold more reserves as a buffer to avoid the reputational risks from using a central bank liquidity backstop (Anderson et al., 2026; Logan et al., 2026). More broadly, the demand for reserves varies according to the reserves regime. Demand is higher when central banks seek to control short-term interest rates by remunerating reserves while supplying ample liquidity to the market (an ample reserves regime), in contrast to the regime of scarce reserves prior to the global financial crisis (Borio et al. 2024).
Balance sheet size also matters for the cost of public debt
Bond holdings and reserves both affect central bank profits and thus the costs of public debt. QE effectively shortened the average maturity of public debt in the consolidated balance sheet of the general government and the central bank, replacing long-term fixed-rate bonds by short-term floating-rate reserves (OECD, 2023). This increased the speed of transmission of changes in policy rates to public debt costs, making the latter more volatile. Very low policy rates in QE years reduced effective debt costs via higher central bank profits, transferred to governments as dividends. Conversely, higher policy rates in recent years have increased reserve remuneration costs, inducing central bank losses. A smaller balance sheet would reduce the volatility of public debt costs, although such an objective could also be achieved by tilting central bank bond holdings towards shorter-term securities (Schnabel, 2025).
References
Anderson, A.G., A. Barbarino, A.M. Diercks, and S. Miran (2026), “A user’s guide to reducing the Federal Reserve’s balance sheet”, Finance and Economics Discussion Series 2026-019, Board of Governors of the Federal Reserve System, Washington, March. https://www.federalreserve.gov/econres/feds/a-users-guide-to-reducing-the-federal-reserves-balance-sheet.htm
Ando, M., B. Conigrave, Á. Pina and C. Roulet (2026), “The investor base for sovereign debt: recent developments and potential implications”, OECD Ecoscope blog, February.
Bailey, A. (2024), “The importance of central bank reserves”, Lecture in honour of Charles Goodhart, London School of Economics, May.
BIS (2025), BIS Quarterly Review, September, Bank for International Settlements.
Borio, C., P. Disyatat and A. Schrimpf (2024), “The double-faced demand for bank reserves and its implications”, VOXEU CEPR Column, Centre for Economic Policy Research, February.
Cipollone, P. (2025), “Striking the right balance: the ECB’s balance sheet and its implications for monetary policy”, Speech at an MNI Connect webcast, February.
Logan, L. and S. Schulhofer-Wohl (2026), “Options for reducing the size of the Fed’s balance sheet”, Dallas Fed Economics in Depth, Federal Reserve Bank of Dallas, Texas, April.
OECD (2026a), OECD Economic Outlook, Volume 2026 Issue 1: Under Pressure, OECD Publishing, Paris.
OECD (2026b), Global Debt Report 2026: Sustaining Debt Market Resilience Under Growing Pressure, OECD Publishing, Paris,
OECD (2023), OECD Economic Outlook, Volume 2023 Issue 1: A long unwinding road, No. 113, OECD Publishing, Paris.
Schnabel, I. (2025), “Towards a new Eurosystem balance sheet”, Speech at the ECB Conference on Money Markets 2025, November.
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