8  All speeches are available online at www.bankofengland.co.uk/speeches  8  8  backed by a government indemnity . The Bank’s exposure then consists simply of an overnight loan to that subsidiary, matched against its primarily short-term liabilities (Table 2 illustrates this using the last published accounts), and the government has a natural hedge for its indemnity in that changes in interest rates have partly offsetting effects on the value of the indemnity and the cost of new debt issuance. The other task for the second line financial risk function is to ensure that there is adequate transparency for policymakers, government and the public over how the exposures can change over time, under different scenarios, so that future decisions are made with full information. That is done – as it has been since the onset of quantitative easing – through multiple channels, including periodic internal reports to the Bank’s Court and HM Treasury, and external analysis and data, including in the Bank’s Quarterly Bulletin and the 9  BEAPFF annual accounts. As of January 2017, the fund had generated about £ in net interest income, sufficient to cover the mark-to-market impact of a material increase in interest rates. Table 2: 2015/16 Bank of England and BEAPFF balance sheets  10  8  For more details, see the Bank of England Asset Purchase Facility Fund Limited Annual Report at http://www.bankofengland.co.uk/publications/Documents/other/markets/apf/boeapfannualreport1606.pdf. 9 Not including unrealised mark to market profits. Data available in Appendix A of https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/bulletins/publicsectorfinances/jan2017. 10 See http://www.bankofengland.co.uk/publications/Documents/annualreport/2016/boereport.pdf and http://www.bankofengland.co.uk/publications/Documents/other/markets/apf/boeapfannualreport1606.pdf.

There are some profound differences between central bank risk management and that in the private sector: in particular, the lack of a hard financial constraint, the inverted risk tolerance in times of stress and the dominant influence of policy imperatives. But there are also many areas where we have been able to gain enormously from the straightforward adoption of best-practice market techniques, including stress testing, risk tolerance and limit structures, and a wide range of risk review standards. What are the next challenges? As I alluded to before, risk managers and CROs in commercial firms are upstream from us in the chain of defences in the global financial system. This means that the more you can do to throw light on your organisations’ potential liquidity needs under stress, and the potential mitigants for that stress, not only will it help you and your supervisors, it will also help central banks to be better watchmen for tail events, and more effective firefighters if the building ever needs to be evacuated. My second main message is that, we are also members of the wider risk management community, dealing with similar concepts and sometime identical products, but with a different perspective. So we look forward to a rich and ongoing dialogue with you as you develop better and more robust ways to manage and diversify risk. 15  All speeches are available online at www.bankofengland.co.uk/speeches  15