A report by the Credit Suisse Research Institute looks at how central banks have changed since the financial crisis and at the challenges they face. It sets out two possible scenarios: that monetary policy will return to 'normal' or that, due to economic or political reasons, or a combination of both, central bank policy will find a 'new normal'.

Impact of Basel III

One of the challenges central banks have faced since the 2008 financial crisis is the impact the new regulatory framework has had on their balance sheets. The report states: “The new regulations have serious consequences for central banks themselves and will influence the definition of their future role.” It sets out three impacts of the Basel III framework for central banks:

1. they will not be able to reduce their balance sheets to pre-crisis levels due to the liquidity requirements;
2. they are likely to become providers of 'safe' assets to a broader group of counterparties; and
3. they may be expected to start playing an increasing role as funding providers, also in stable times.

Safer asset classes

The following graph shows how the Federal Reserve, the European Central Bank and the Bank of Japan maintain a mix of asset types on their balance sheets.

According to Credit Suisse's Oliver Adler, central banks have changed their policy-making in dramatic ways since 2008. He says that this was initially “to prevent a major destabilization of the financial system in the immediate aftermath of the financial crisis, and thereafter to offset evolving deflation risks. The coming years will be decisive in relation to the future direction of central bank policy, depending on both economic and political developments. Even if the influencing factors are difficult to predict, we believe that the discussion of the future of monetary policy needs to be reinforced.”