And operational reforms designed to address the deficiencies in the Bank’s pre-crisis lending tools and flag 5  clearly that the Bank was ‘open for business’ , have left the Bank capable of lending to a wide range of banks and non-banks, against many different types of collateral, at lower prices, and through a broad range of facilities. As of 2016, members of the Bank’s Sterling Monetary Framework – our main liquidity-providing tool – had pre-positioned over £ of collateral with us, including 30% of the UK’s total stock of household mortgage loans. Only a fifth of that collateral had been drawn against, through the Funding for Lending Scheme and other Bank facilities. Even after accounting for the Bank’s sizeable haircuts, that leaves well over £ of available credit: a much higher proportionate level of contingent exposure for the Bank than typically incurred by commercial banks through undrawn facilities. So our balance sheet may expand in both scale and riskiness at times of heightened liquidity stress: the Bank of England’s role as financial firefighter has shifted permanently upwards (Chart 5). 5  See http://www.bankofengland.co.uk/publications/Documents/news/2012/cr2winters.pdf; and the Bank’s new framework at http://www.bankofengland.co.uk/markets/Documents/money/publications/liquidityinsurance.pdf. The reforms are summarised in a speech by the Governor at http://www.bankofengland.co.uk/publications/Pages/speeches/2013/690.aspx. 6  All speeches are available online at www.bankofengland.co.uk/speeches  6  The third key driver behind our new risk framework has been the strong public demand for greater accountability and transparency from central banks since the financial crisis.

3  All speeches are available online at www.bankofengland.co.uk/speeches  3  But before you all rush to sign up as central bank Chief Risk Officers, free forever from the headaches of commercial capital management, a word of caution. Central banks cannot create money willy-nilly without imperilling inflation, undermining their own monetary stability goals. They typically only lend large amounts on a secured basis – so their lending is limited by the supply of collateral available in the private sector. And, perhaps most profoundly of all, weakly capitalised central banks may find it hard to convince markets that they retain the ability to pursue their broader policy objectives without potentially costly recourse to fiscal resources, or further currency debasement. These limits on central bank balance sheet expansion – 1  sometimes referred to as ‘policy solvency’ constraints – can be every bit as binding as financial solvency requirements. Recent developments in the Bank of England’s own financial risks Despite central bankers’ readiness to enter burning buildings, and the lack of a binding financial solvency constraint, the Bank of England’s balance sheet was actually very modestly sized in the decades leading up the financial crisis, at less than 5% of UK GDP (Chart 2). The Bank did provide emergency assistance in the 2  mid-1980s and early 1990s , but (by recent standards at least) those exposures were small and short-lived. Other than that, the Bank primarily held high quality, low-duration assets to back a relatively stable stock of sterling banknotes and commercial bank reserves.