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Too Big to Succeed? Central Bank Balance Sheets Continue to Balloon

e21 | April 20, 2012

Since 2006 the balance sheets of the eight largest central banks around the globe have nearly tripled--now totaling almost $15 trillion. Much of this explosion, seen in the chart below from Ritzholtz.com, can be attributed to asset purchases by the Fed, ECB, and BOJ, each of whom has sought new means of monetary easing with their benchmark rates near zero. A perspective on the sheer size of these balance sheets can be obtained by comparing their sum to the entire market capitalization of global equity markets. The $15 trillion held by major central banks is approximately 33% of the global equity market capitalization. In 2007 it was a mere 10%.

As seen in the e21 chart above, China, the United States, Europe, and Japan have by far the largest balance sheets in the world after expansion in recent years. However, the size of these balance sheets may continue to grow rather than shrink. The Federal Reserve is still weighing options around QE3. The ECB added to its balance sheets with its recent LTRO actions and sovereign debt purchases. The central bank may decide to undertake similar actions as the fiscal outlooks for Spain, Greece, and Portugal continue to deteriorate. The Bank of Japan has debated further expansion of its balance sheet in recent meetings and China’s slowing economy may give the People’s Bank of China reason to expand its holdings.


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