An investor, on the other hand, normally needs to have the money over a longer period of time, as it usually takes a while before an investment pays off. The financial sector offers two possible solutions to this conflict of interests. The investor can either turn to a bank, which can convert savings into long-term lending, or the investor can issue securities directly onto the market. In both cases, the saver can normally regain his money at relatively short notice. In the first case, the money is withdrawn from the bank and this works painlessly, unless all the other savers have the same idea at the same time. In the second case, the securities are sold on a secondary market. Without these possibilities to quickly realise savings, there would be much less money channelled into investments, which are of crucial importance for economic development. A properly functioning capital allocation is thus of major importance to a country's long-term growth, which is also confirmed by several empirical studies made in this field. Mohsin Khan and Abdelhak Senhadji have made a review of such studies for the IMF. I can recommend it for those who are interested. Facilitating risk management Then we come to the third fundamental task of the financial sector; facilitating the management of economic risks. As I mentioned earlier, Swedish savers have already realised the importance of not investing all their savings in the same place.
In the June addendum, the FOMC noted that reducing the Fed’s securities holdings will result in a declining supply of reserve balances, and that it anticipates reducing the quantity of reserve balances to a level “appreciably below that seen in recent years but larger than before the financial crisis.” New York Fed staff projections for possible paths of the Fed’s securities portfolio—constructed using a distribution of market participants’ surveyed expectations for the future size of the Fed’s balance sheet (conditional on not moving to the zero lower bound at any point between now and 2025), along with some staff modeling to fill in details—suggest it will take at least several years for the balance sheet to reach its “normal” size.14 Uncertainty about the time of normalization arises from numerous sources, including future levels and variability of demand for different types of Fed liabilities, the pace at which the agency MBS portfolio will pay down, and of course the economic outlook. Assuming that balance sheet normalization continues uninterrupted, it seems likely that the future balance sheet size will be driven largely by changes in longer-run demand for Fed liabilities —in contrast to the asset-driven balance sheet of the past decade. The FOMC explains in the June addendum that reserve balances will be driven by the banking system’s demand for reserves and the Committee’s decisions about how to implement monetary policy in the future.