Second, a more aggressive approach would risk an immediate and substantial rise in longer-term yields that, at this time, would be counterproductive for achieving the FOMC’s objectives. Third, the effects of swings in the balance sheet on the economy are difficult to calibrate and subject to considerable uncertainty, given our limited history with this policy tool. And fourth, policymakers do not need to use this tool to tighten financial conditions. They can tighten financial conditions as  3  An alternative explanation is that the large-scale asset purchases have had no effect and that the low levels of rates and spreads simply reflect other factors. However, I believe the evidence indicates that the asset purchases have contributed to the low level of longer-term rates. BIS Review 39/2010  3  much as needed by raising short-term interest rates, offsetting any lingering portfolio balance effects arising from the still-elevated portfolio. Even under this cautious strategy of relying only on redemptions, the Federal Reserve could achieve a considerable decline in the size of its balance sheet over time. From now to the end of 2011, we project that more than $ billion of the agency debt and MBS held by the Federal Reserve will mature or be prepaid, though the actual total will depend on the path of long-term interest rates and the prepayment behavior of mortgage holders. Thus, the Fed’s asset holdings would shrink meaningfully if the FOMC maintains its current strategy of not reinvesting those proceeds.
This is an incarnation of the wise measures adopted by the government under the leadership of the Custodian of the Two Holy Mosques to carry out more structural reforms (institutional and regulatory) which we have begun to feel their positive effects in all aspects of economy. It will be appropriate here to say a few words about the dynamic and crucial role played by the banking sector in the Kingdom, which is manifested in the substantial increase in the credit extended to the private sector which grew by 29 percent annually during 2003 – 2005; and it amounted to Rls 436 billion at the end of 2005. As a result of the expansion in banking business, the assets of the banking sector increased by 14.4 percent annually during the past three years (2003 – 2005). At the end of the first quarter of 2006, they stood at Rls 797.4 billion, constituting about 70 percent of the Kingdom’s economy. Deposits with the banking sector rose by 13.7 percent annually during the past three years, and they amounted to Rls 521.5 billion at the end of the first quarter of 2006. The positive indicators of the banking sector which rest on the robust fundamentals of the Saudi economy have prepared an appropriate environment for banks to adapt to successive, regional and international changes during the previous period. Banks operating in the Kingdom have been able to overcome the crises that hit other economies, and have been able to benefit from banks’ experiences and modern banking technology.