8 “The Committee currently anticipates reducing the quantity of reserve balances, over time, to a level appreciably  below that seen in recent years but larger than before the financial crisis; the level will reflect the banking system’s demand for reserve balances and the Committee’s decisions about how to implement monetary policy most efficiently and effectively in the future. The Committee expects to learn more about the underlying demand for reserves during the process of balance sheet normalization.” See the Addendum to the Policy Normalization Principles and Plans, June 13, 2017. Minutes to the FOMC’s November 2016 meeting summarize the FOMC’s discussion of its long-run framework and its implications for the long-run balance sheet size. 9 Logan, Implementing Monetary Policy: Perspective from the Open Market Trading Desk, May 18, 2017. 10 See Leonard, Martin and Potter, How the Fed Changes the Size of Its Balance Sheet, July 10, 2017, for detail on  how these transactions work in practice. 11 Interest is not reinvested. Instead, the Federal Reserve’s net income is remitted to the Treasury. 12 This is done by placing noncompetitive add on bids at Treasury auctions and by buying agency MBS on the open  market.
Take, for example, the bank sector’s solvency, measured as the ratio of equity capital to the balance sheet total. This amounts to only a few per cent, whereas the level in non-financial firms is 20, 30 or even 40%. So a simple way of solving the bank sector’s vulnerability would be to raise the capital base to what is customary in other companies. Banks would then be in a better position to cope with unexpected disturbances in the financial markets. Maintaining a large reserve of equity capital for unexpected events is, however, costly and someone would have to pay for this. The solution would therefore lead to expensive credit and low interest on  1  BIS Review 9/2000  deposits. Projects that are not exceptionally profitable would not obtain finance and the level of saving in the economy would be low. With little investment and low saving, growth would ultimately falter and prosperity would suffer. From this it will be readily understood that unduly tight capital adequacy requirements for the bank sector can be very costly for the entire economy. So if the whole economy would be liable to suffer because the banking system opts for or is coerced into holding a sizeable capital reserve, one can say that this is not a viable remedy for ensuring the financial system’s stability. But how, then, are financial crises to be prevented?