When the central bank steps back, someone else has to hold the debt
Serguey Asael Shinder2 min readTwo central bank publications from the past fortnight, from very different economies, turn on the same question: who ends up holding the other side of the balance sheet.
In Japan, the Bank of Japan's preliminary flow of funds for the second quarter shows the central bank's share of government bonds and treasury bills at 41.16% at the end of June, down from 47.90% at the end of 2023. Banks raised their share to 14.88% from 12.51% a year earlier, public pensions to 6.71% from 5.27%, and households - long almost absent from the market - to 1.92%, nearly double their share two years ago. The same data show household financial assets up 11.0% in a year, with deposits almost flat and equity and investment trusts sharply higher.
In India, an article in the Reserve Bank's September Bulletin argues that a credit-deposit ratio above 80% is not, by itself, a sign that banks are lending beyond their funding. Deposits, it points out, are created when banks lend; they are not a pool that has to be filled first.
The common thread
Both are about the transition from one funding structure to another. Japan spent a decade with the central bank as the buyer of last resort for government debt; as it withdraws, the bonds have to find private owners, and those owners want a return that reflects the risk they are taking. India's banks are funding fast credit growth partly through borrowing rather than deposits, and the RBI's authors argue this is sustainable as long as capital, liquidity and profitability hold.
Neither transition is a problem in itself. Both depend on a price. In Japan, the price is the yield at which banks, pensions and households are willing to hold a larger share of the debt - which is why the flow of funds matters for a central bank that has just raised its call rate guideline to around 1.25%. In India, it is the cost of the non-deposit funding that has filled the gap.
What to watch
The Japanese shares are measured at market value, so they move with prices as well as with buying, and the flow of funds is preliminary. The Indian article is the authors' view, not the RBI's. But together they suggest where to look in each case: in Japan, at who buys at each auction as the central bank steps back; in India, at the cost and maturity of the borrowing that now sits alongside deposits.