Even so, nonbank lenders may be captive to perceptions of their investors (who may be less informed and more skittish), resulting in preemptive reductions in exposures to some bank counterparties and contributing to market freezes in spite of lenders’ own analysis. 8  The leverage ratio creates a direct cost only if it is binding but banks also appear to take into account the possibility of it binding in the future and how it might be treated in stress tests. BIS central bankers’ speeches  3  illustrates is that interbank trade increases the aggregate size of the balance sheet of the banking sector. Suppose, instead, that a nonbank that is currently lending to Bank A would lend to Bank B. As a result Bank A would have fewer reserves and deposits, so its balance sheet would decrease in size. Bank B would have additional reserves and its balance sheet would increase in size, just as in the above example. However the size of the aggregate balance sheet of the banking sector would not change, as shown in the lower part of Figure 4. The two sets of transactions achieve the same movement of reserves from Bank A to Bank B, but if there is a cost associated with the size of banks’ balance sheets, then the second option would likely be preferred. The three parties would be expected to find a way to share the surplus generated by the lower balance sheet cost.
What are the fiscal implications of large central bank balance sheets? 23 More research on these topics seems highly desirable. Conclusion To conclude, I want to congratulate Ulrich for an excellent paper that should be required reading in central banks that are thinking about their monetary policy implementation frameworks. Ulrich provides a unique blend of academic and practitioner insight from which I learned a lot. I do believe that there remain some important unanswered questions when it comes to evaluating monetary policy implementation frameworks. Ulrich’s paper starts us on the right path and hopefully the broader research community can start to work on some of these important issues. References Bank of England (2013). “Liquidity Insurance at the Bank of England: Developments in the Sterling Monetary Framework.” Carlson, Mark, Burcu Duygan-Bump, and William Nelson (2015). “Why Do We Need Both Liquidity Regulations and a Lender of Last Resort? A Perspective from Federal Reserve Lending during the 2007–09 U.S. Financial Crisis.” Finance and Economics Discussion Series 2015–011. Washington: Board of Governors of the Federal Reserve System. Eisenbach, Thomas, Andrew Haughwout, Beverly Hirtle, Anna Kovner, David Lucca, and Matthew Plosser (2015). “Supervising Large, Complex Financial Institutions: What Do Supervisors Do?,” Federal Reserve Bank of New York Staff Reports, no. 729, May. Federal Reserve (2007). Press Release August 17, 2007. Goodfriend, Marvin and Jeffrey M. Lacker (1999).“Limited Commitment and Central Bank Lending.” Federal Reserve Bank of Richmond Economic Quarterly,Volume 85/4, Fall. Keister, Todd (2016). “Bailouts and Financial Fragility.” Review of Economic Studies, Vol. 83: 704–736. Tarullo, Daniel K. (2014).