The Central Bank's Balance Sheet

What a central bank owns and owes, how its balance sheet creates money, and why the size of central bank balance sheets exploded after 2008.

Like any bank, a central bank has a balance sheet listing its assets, what it owns, and its liabilities, what it owes. Understanding it helps explain how central banks create money.

Liabilities

A central bank’s main liabilities are:

Currency in circulation: the banknotes people use are technically liabilities of the central bank.
Bank reserves: deposits that commercial banks hold at the central bank.
Government deposits: the government’s accounts at the central bank.

Currency and reserves together make up base money, also called the monetary base.

Assets

Typical assets include:

Government bonds.
Foreign exchange reserves, such as dollars, euros and gold. For the Reserve Bank of India, foreign currency assets and gold make up a large share of assets.
Loans to banks.

How money is created

When a central bank buys a government bond from a bank, it pays by crediting the bank’s reserve account. Both sides of the balance sheet grow: assets rise by the bond, and liabilities rise by the new reserves. The central bank has created money electronically.

Growth after 2008

Before 2008, central bank balance sheets were relatively small. During the financial crisis and especially the COVID-19 pandemic, central banks bought huge amounts of bonds through quantitative easing. The U.S. Federal Reserve’s balance sheet grew from under 1 trillion dollars before 2008 to around 9 trillion dollars in 2022. The European Central Bank and Bank of Japan expanded theirs similarly, with the Bank of Japan’s balance sheet exceeding the size of Japan’s entire economy.

Buying a bond

The central bank buys 1,000 crore rupees of government bonds from a commercial bank. The commercial bank's bonds are replaced by 1,000 crore rupees of reserves in its account at the central bank. The central bank's balance sheet expands by 1,000 crore rupees on both sides. New money now exists that did not before.

Thinking central banks print physical cash to create most money

Most money central banks create today is electronic reserves, not printed notes. Printing banknotes mainly meets public demand for cash.

Key takeaways

A central bank's balance sheet lists its assets and liabilities.
Currency and bank reserves form base money.
Buying assets expands the balance sheet and creates reserves.
Balance sheets grew enormously after 2008 and during the pandemic.