<p>“If a central bank sells bonds, theoretically, the money used to buy those bonds is taken out of the deposit accounts of the country's banks”</p>
<p>This is generally correct.  But the following statement:</p>
<p>“ This can reduce the reserves the banks are required to have, causing them to sell loans and investments (L&amp;I) to lower their overall assets to bring them in line so the banks can keep their require reserves”</p>
<p>Is not necessarily correct. If the central bank has been operating a policy of Quantitative Easing , the banks are likely to have excess reserves.  Thus, they are ok to reduce their reserves without a need to replenish.  Indeed that is the case in the US currently.</p>
<p>Just to be clear, central banks may ‘sell’ bonds simply by letting existing bonds in their portfolio mature.</p>
<p>Now eventually , if central banks sell too many bonds, banking reserves may indeed get tight, and then you will get a natural rise in short term rates as banks attempt to replenish. You are right that the system overall cannot generate reserves simply by transferring assets between private market participants.</p>

CC BY-SA 4.0
2022-06-09T13:50:28.623Z
Thanks for your answer! It was helpful. I wasn't writing about QE, but I should have been more specific.
jung
CC BY-SA 4.0
2022-06-08T11:00:31.163Z
2022-06-08T11:00:31.163Z
dm63
<p>If a central bank sells bonds, theoretically, the money used to buy those bonds is taken out of the deposit accounts of the country's banks. This can reduce the reserves the banks are required to have, causing them to sell loans and investments (L&amp;I) to lower their overall assets to bring them in line so the banks can keep their require reserves. Theoretically, again, the money used to buy the L&amp;I are, again, taken out of the banks' deposits by customers all over the country. This makes the banks' assets equal their liabilities. However, wouldn't the money the banks get from selling L&amp;I increase their assets? That wouldn't make the assets equal liabilities, right? I don't understand why the banks' assets don't rise when they sell L&amp;I.</p>
<p>Thanks!</p>

CC BY-SA 4.0
2022-07-10T04:20:06.083Z
On March 15, 2020, the Fed reduced reserve requirement ratios to zero percent effective March 26, 2020.
H2ONaCl
CC BY-SA 4.0
2022-07-16T21:28:13.953Z
Your question starts with "a central bank sells bonds" and it also asks "wouldn't the money the banks get from selling". If we assume "bank" means the central bank and "banks", plural, means the set of all private sector banks, then your question makes no sense to me. If the central bank sells, the private sector is buying.
H2ONaCl
<macroeconomics>
Fed's sales of government bonds and its effects on banks' assets
jung
# Fed's sales of government bonds and its effects on banks' assets

(Asked by: username_0 on 2022-06-08)

If a central bank sells bonds, theoretically, the money used to buy those bonds is taken out of the deposit accounts of the country's banks. This can reduce the reserves the banks are required to have, causing them to sell loans and investments (L&I) to lower their overall assets to bring them in line so the banks can keep their require reserves. Theoretically, again, the money used to buy the L&I are, again, taken out of the banks' deposits by customers all over the country. This makes the banks' assets equal their liabilities. However, wouldn't the money the banks get from selling L&I increase their assets? That wouldn't make the assets equal liabilities, right? I don't understand why the banks' assets don't rise when they sell L&I.

Thanks!

**Tags:** macroeconomics

> **Comments:**
> **username_1**: On March 15, 2020, the Fed reduced reserve requirement ratios to zero percent effective March 26, 2020.  
> **username_1**: Your question starts with "a central bank sells bonds" and it also asks "wouldn't the money the banks get from selling". If we assume "bank" means the central bank and "banks", plural, means the set of all private sector banks, then your question makes no sense to me. If the central bank sells, the private sector is buying.  

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## 1 answers

### Answer by username_2 on 2022-06-08. Score: -1

“If a central bank sells bonds, theoretically, the money used to buy those bonds is taken out of the deposit accounts of the country's banks”

This is generally correct. But the following statement:

“ This can reduce the reserves the banks are required to have, causing them to sell loans and investments (L&I) to lower their overall assets to bring them in line so the banks can keep their require reserves”

Is not necessarily correct. If the central bank has been operating a policy of Quantitative Easing , the banks are likely to have excess reserves. Thus, they are ok to reduce their reserves without a need to replenish. Indeed that is the case in the US currently.

Just to be clear, central banks may ‘sell’ bonds simply by letting existing bonds in their portfolio mature.

Now eventually , if central banks sell too many bonds, banking reserves may indeed get tight, and then you will get a natural rise in short term rates as banks attempt to replenish. You are right that the system overall cannot generate reserves simply by transferring assets between private market participants.

> **Comments:**
> **username_0**: Thanks for your answer! It was helpful. I wasn't writing about QE, but I should have been more specific.  

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