In particular that will mean:  -  Ensuring that prices, rates and collateral haircuts are well aligned to the Bagehot principle to ensure any facilities remain strictly backstops that are used when conditions become materially dysfunctional, but leave the burden of ensuring safe operation during a wide range of normal and less-normal market conditions with market participants, and the regulatory regimes they are subject to; and  -  Ensuring facilities are naturally self-liquidating, in that they build up exposures when markets are dysfunctional, but run them down when functioning returns to normal – delivering sufficient risk  23  Investment funds, for example, outnumber banks by several orders of magnitude. 12  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  12  transfer to kick start private sector activity during periods of dysfunction, while limiting the scale and persistence of risks to public funds. These are not straightforward tradeoffs, and different jurisdictions may choose different points along them, depending on the relative importance of banks and financial markets in their local economies, their central bank mandates, and their risk preferences. But given the multiple institutional, technological and crossborder linkages that characterise our core markets, we have a strong common interest in setting out the choices. A recent Brookings paper by Nellie Liang and Pat Parkinson touches on a number of these issues as they relate to the US Treasury market.24  Conclusion  It is sometimes said that hard cases make bad law.

10  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  10  Table 1: Lessons from the dash for cash for future market dysfunction tool design  Standing liquidity facilities for banks  Special market wide operations using large scale asset purchases and other preexisting tools  Positives  Challenges  Future design questions  Regular, well understood  Banks did not meet all nonbank liquidity needs – so not a fully effective conduit for central bank liquidity  Whether central banks need the ability to reach a wider range of market participants directly (and, if so, who)  Operations typically one way (‘buyer of last resort’) and much longer duration than the dysfunction  Whether there should be more targeted two-way or selfliquidating tools better aligned with term of dysfunction  Operations conducted using tools also aimed at easing monetary policy  How to deal with market dysfunction in periods when the optimal policy response differs from that required for monetary policy purposes  Operations were ad hoc or discretionary  Whether more permanent standing facilities might better shape expectations  Effectiveness – ‘got in all the cracks’  No explicit ‘insurance premium’ in facility pricing – risks fuelling moral hazard if expected to prevail in future  Whether to adopt Bagehot pricing/terms: eg buying at below pre-stress prices but above stress prices and/or pricing / haircuts  Took risk off private sector balance sheets  Added risk to public sector balance sheets  How to judge appropriate risk sharing, and set bounds on public sector exposure  Ability to ‘go big and go fast’ necessary in the face of the Covid pandemic  The first is that central banks are likely to face increasing calls to provide public liquidity insurance for instances of severe financial market dysfunction in the years ahead, as the reliance on those markets grows, vulnerabilities to liquidity shocks persist, and intermediation capacity remains constrained.