From Lender of Last Resort to Market Maker of Last Resort via the dash for cash: why central banks need new tools for dealing with market dysfunction Speech given by Andrew Hauser, Executive Director, Markets  Reuters, London 7 January 2021  I am grateful to Tim Taylor for his assistance in writing this speech; and to Andrew Bailey, Imane Bakkar, Yuliya Baranova, Charlotte Barton, Alex Brazier, Jon Bridges, Alice Carr, Geoff Coppins, Ed Denbee, Johnny Elliot, Gerardo Ferrara, Bernat Gual-Ricard, Jon Hall, Sarah Hall, Nicholas Jackson, Joshua Jones, Anil Kashyap, Nick McLaren, Ankita Mehta, Matt Roberts-Sklar and Andrea Rosen for their comments and guidance. 1  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  Introduction  Increasingly we look to financial markets, rather than banks, to care for our savings or provide credit. Millions save via pension, investment or exchange traded instruments. Companies and local authorities hold cash in money market funds. And firms, large and small, borrow from capital markets or non-bank lenders. Taken together, fully half of all financial assets are now held outside the banking system. These trends aren’t new – and to the extent that they bring broader access to cheaper, faster, and more diverse financial services, they’re good news. But they do pose novel challenges to financial stability. In particular, as its usage grows, market-based finance seems increasingly prone to liquidity shocks.

6  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  6  Chart 3: Holdings in Corporate Bond Secondary Market Scheme  Source: Bank of England  The review of the Bank’s liquidity framework carried out by Bill Winters in 2012 recommended formalising the Bank’s approach to MMLR, setting out public principles under which future interventions might occur.13 Various proposals on these points had been made in the wake of the GFC, by – amongst others – Paul Tucker, Perry Mehrling, Michael Dooley and Stephen Cecchetti.14 But in the event, the Bank – in common with other central banks – chose to say relatively little in public. That reflected a number of factors, including the practical challenges of determining in advance the markets in which central banks might operate, the terms on which they would do so, and the consequences for public money. In the years that followed, the topic received little active attention, either inside or outside central banks. II)  Covid, market dysfunction and central bank interventions  The experience of Covid has changed that. This is not the place to review the actions taken by central banks since last Spring in detail: many have covered that elsewhere.15 Instead, I want to pull out a number of lessons from that experience that, directly or indirectly, can help inform future tool design. 13  https://www.bankofengland.co.uk/-/media/boe/files/news/2012/november/the-banks-framework-for-providing-liquidity-to-the-banking See for example https://www.bankofengland.co.uk/speech/2009/last-resort-lending-market-making-and-capital, https://press.princeton.edu/books/hardcover/9780691143989/the-new-lombard-street, and the papers from the 2014 workshop on ‘Rethinking the lender of last resort’ held at the Bank for International Settlements (https://www.bis.org/publ/bppdf/bispap79.pdf).