The FOMC also indicated that it anticipates that these caps will remain in place once they reach their respective maximums. Over time, as the Fed holds fewer securities, the private sector will gradually hold more. At the same time, Fed liabilities held by the private sector, in particular reserve balances, will decline equivalently. Panel 2, which draws on a July 2017 update to the System Open Market Account annual report, illustrates how the caps will evolve in relation to anticipated maturities of Treasuries, on the left hand side, and agency MBS on the right. As can be seen, once the caps are fully phased in, in many months the caps are not expected to be binding, and so there would be no reinvestments 3/7  BIS central bankers' speeches  in those months. However, the caps will be exceeded in months with large Treasury maturities, and we would reinvest the amount above the cap. For agency MBS, a change in conditions could encourage faster MBS repayments than are shown here, producing monthly paydowns larger than the 20 billion cap and thus some reinvestments—an issue I will return to later. Policymakers have indicated that they want the portfolio’s size to decline “in the background,” and that the federal funds rate will be the primary instrument of monetary policy. Balance sheet normalization is expected to continue until the FOMC judges that the Federal Reserve is holding no more securities than necessary to implement monetary policy efficiently and effectively.
When banks would have identical response functions, economic cyclicality would increase, potentially creating additional instability. At the same time, excessive variation in risk measurement is clearly undesirable. Finding the right balance is the key. The preliminary work suggests we may not have the balance right in the current set-up. But as with all of our work on implementation, it is necessary to identify problems before we can set about correcting them. The on-going analysis has generated a wealth of information about risk modelling by banks. This is useful for international policymakers. The Committee has not yet decided what actions it might take in response to the analysis, but some of the possible policy options could comprise improvements in public disclosure practices, limitations in the modelling choices for banks, and further harmonisation of supervisory practices. These ideas will also feed into the current fundamental review of the trading book. In addition, our international study provides national supervisors with a much clearer understanding of how the risk models of their banks compare to those of international peers. This means that national supervisors are much better equipped to discuss the results with their banks and take action where needed. The Committee will be doing further work on the trading book, in addition to the banking book work, to explore the outcomes in more depth. I am confident that it will generate additional insights in the modelling of risk-weighted assets and to explain better why modelling results differ across banks.