Philip Lane, a member of the ECB, stated at a conference that central bank reserves should be higher and more volatile compared to levels before the global financial crisis. Lane underscored the importance of maintaining a balance of reserves that minimizes risks associated with either scarcity or abundance.
Lane suggested a ‘middle path’ strategy to encourage commercial banks to lend despite risks associated with illiquid assets in an environment increasingly susceptible to macro-financial shocks. He proposed that these reserves be supplied through a structural bond portfolio and longer-term refinancing operations, in addition to standard short-term ones.
This strategy is designed to provide extended liquidity to the banking system and create a flexible supply, thereby reducing the need for banks to accumulate precautionary reserves. The new framework aims to ensure stability in the financial sector while encouraging lending activities from commercial banks.
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Source: Economy - investing.com
