But the point has been made, and I think it is a valid point, that competition – so necessary to ensure that customers get the best possible service at the least possible price – depends more heavily on the variety of business models rather than on having a large number of institutions giving roughly the same kind of services in more-or-less the same way. Increased competition does not result from just adding more firms with the same business model, but also, indeed perhaps more, by adding firms with different business models. Where there is more diversity, and where there are more alternatives to choose from, competition is enhanced and its benefits increased. Perhaps I should point out that several decades ago there were many people, including many of the local business community, who were afraid to approach a bank for a loan. They were prepared to give and receive credit directly to and from each other, believing they were neither charging nor being charged interest, but not to borrow from a bank that explicitly charged interest and made a profit “at their expense”. Never mind that the implicit rate of interest in the credit being given and received in this way was probably higher than that being charged by the banks. I should not be at all surprised if there were still people around, potential entrepreneurs, who still reasoned that way, and who therefore may be “financially  2  BIS central bankers’ speeches  excluded” from the economy.

Step 2 relates to the potential for market participants, acting on their own or in concert with the authorities, to reduce vulnerabilities by strengthening market-wide infrastructures or practices. The recent proposal by Darrell Duffie to mandate central clearing of US government bonds is an example of this type of work.3  But my topic today relates to Step 3: the role that central bank balance sheets should play in dealing with market dysfunction. I deliberately come to this last, because, while it is central banks’ job to restore financial stability where self-insurance is too socially costly, they should be backstop providers of liquidity, not a first port of call. In that sense, their tools should complement, not substitute for, the other vertices of the triangle. Outside of pandemics, massive doses of system-wide anti-inflammatories do not meet that design brief. Long-term protection requires a more targeted remedy, as the Bank’s Financial Policy Committee concluded last October.4  2  https://www.fsb.org/2020/11/fsb-acts-to-address-issues-highlighted-by-march-market-turmoil/ https://www.brookings.edu/research/still-the-worlds-safe-haven/ 4 ‘The FPC considers it important to examine whether central banks should have facilities to provide liquidity to the wider financial system in stress, in order to support market functioning. Any such backstop of liquidity would need to be provided in a way that is not just effective and efficient but that also, through appropriate pricing and accompanying regulatory requirements, reduces incentives for excessive risk taking in the future’ (https://www.bankofengland.co.uk/financial-policy-summary-and-record/2020/october-2020). See also Box 7 of the August 2020 FSR (https://www.bankofengland.co.uk/-/media/boe/files/financial-stability-report/2020/august-2020.pdf) and the Governor’s remarks at Jackson Hole (https://www.bankofengland.co.uk/speech/2020/andrew-bailey-federal-reserve-bank-of-kansascitys-economic-policy-symposium-2020).