Now that the UK Government's fiscal energy measures have been announced, the more comprehensive, integrated assessment that will be embodied in our November forecast can resume its central place in our analysis for, and communication of, monetary policy decisions. The EPG has capped the expected average energy bill at £ for the next two years, a substantially lower level than the earlier Ofgem price cap mechanism would have implied given the evolution of wholesale gas prices. Steps have also been taken to help firms. Higher gas prices will now increase the (indirect) government subsidy to energy users, rather than the utility bills they pay. This shifts the main macro risks stemming from gas price rises away from higher headline inflation and a squeeze on household real incomes towards greater pressure on the fiscal deficit and ultimately the public finances more widely. Ensuring that this shift – in concert with other fiscal policy actions – does not bring the longer-term sustainability of the public finances or respect for the wider institutional  3/8  BIS - Central bankers' speeches  framework for macroeconomic policy into question remains key: both in and of itself, but also because maintaining the credibility and integrity of that framework supports the effectiveness of monetary policy in pursuing its own objectives. In this context, it is welcome that the role played by the Office for Budget Responsibility (OBR) in scrutinising the Government's fiscal plans will be resumed in the forthcoming budget statement.

The unfortunate result was that these banks were not as protected from falling housing prices as many had assumed, and this contributed to the substantial decline in stock prices and the need for government support for many of these large financial intermediaries. Myth 4 – Investment banks were not subject to runs, because their liabilities were collateralized There has long been an understanding, and indeed a regulatory presumption, that banks could be subject to “runs,” resulting in a need for both deposit insurance and a heavily regulated environment to reduce that risk. At the same time, it had largely been presumed that investment banks were better protected against such runs. While the balance sheets of investment banks had substantial short-term liabilities, many of them were collateralized. Investment banks would buy longer-term securities but finance them with short-term borrowing (using repurchase agreements). It was assumed that because there was collateral backing up the loans, borrowers were protected and would not run. Financing securities with short-term borrowing allowed investment banks to substantially expand their balance sheets, as shown in Figure 10. However, the lenders in this market  3  Collateralized debt obligations (CDOs) constructed from subprime asset-backed securities (ABS) are perhaps the most potent example of underestimation of risk. Triple-A rated CDOs did more damage to balance sheets than Triple-A rated ABS. 4  Holding to maturity may have moderated some losses, but many did not have that luxury. Investors needing to sell with the threat of downgrades suffered substantial losses, particularly in an illiquid environment.