As a practical application of this framework, consider the Federal Reserve’s commitment to tailoring and ensuring that supervision is scaled appropriately to the risks associated with different types of institutions.8 Recent examples could include the stress testing distinction between large, complex firms and large non-complex firms; expanded eligibility for the 18-month exam cycle; relief from supervisory assessments, stress testing requirements, and other prudential measures for bank holding companies with less than $ billion; the Bank Exams Tailored to Risk (BETR) program; and the multi-agency proposal to better align prudential standards with the risk profile of large institutions.9 Tailoring allows different firms to operate with different parameters of the policy regime. The largest, most systemically important firms, for example, impose larger potential risks to society than other firms, which implies a different risk/return trade-off and policy mix than for smaller institutions. Without the ability to tailor the regime to reflect the risks associated with different types of institutions, we would likely be left with a one-size-fits-all approach that is not optimal for any type of firm or for the financial system as a whole. Discussion Issues The simple framework that I just described is just that—simple. The real world is much more complicated, and I’d like to spend a few minutes discussing some practical issues. 3/7  BIS central bankers' speeches  Understanding the Trade-off The chart presented above is clearly illustrative and actual policy analysis requires detailed estimates of the potential benefits and costs of each component and the cumulative effect.

For these first six channels, one can argue that it is the expected stock of security holdings to be purchased by a central bank that chiefly determines the amount of accommodation—that is, the impact the central bank’s purchases are expected to have on the size and duration of assets available to the public. Alternatively, for the market function channel, the “flow” effects are most important, in that the transactions associated with a central bank’s asset purchases can also affect an asset price by altering market liquidity and functioning, although such effects may dissipate quickly. This channel could achieve monetary accommodation through the purchase of any security type in which market functioning has become stressed. One example is the European Central Bank’s Securities Markets Programme, which was designed “to address the malfunctioning of securities markets".10 The purchase of non-sovereign assets can be helpful by providing additional channels for 2 / 10  BIS central bankers' speeches  monetary accommodation to be realized. Further, having additional markets to operate in can help central banks overcome functional limitations that could exist if they were restricted to LSAPs in only one market. For example, the stock of assets held by the private sector in a given market might be too small to meet the monetary policy goal. Or, the purchase of a large amount of the existing stock of a given market might result in impaired market functioning, which, in the extreme, could impair the effectiveness of the LSAP and other monetary policy tools.