A Bank of England staff working paper finds that the optimal long-run central bank balance sheet should supply enough reserves to satiate bank demand, plus a modest buffer for uncertainty. Under full information, the model places the welfare-maximizing level of reserves at about 15% of banking sector assets, as additional reserves beyond that point provide little liquidity benefit while crowding out private investment and misallocating capital. Because undersupplying reserves is more costly than oversupplying them, allowing for uncertainty raises the optimal supply. Even under highly robust policy settings, however, the additional buffer is no more than 2.5 percentage points of bank assets, providing no basis in the model for open-ended abundant reserves. The analysis also finds that broadening the range of assets eligible for central bank purchases could reduce capital misallocation by distributing the central bank’s market footprint more widely.
2026-08-28Bank of England
Bank of England research finds optimal reserve supply needs at most a 2.5 percentage point buffer above satiation
A Bank of England staff working paper finds that long-run reserve supply should modestly exceed the level that satiates bank demand. Its model places reserves at about 15% of banking sector assets under full information and adds no more than 2.5 percentage points as a buffer for uncertainty.