While much effort has been made to deepen our understanding of and ability to respond to market dislocation since the global financial crisis, the emergence of these problems suggests the Bank and wider central banking community still have some work to do in throwing light on and building resilience in some of the shadow-ier parts of the non-bank financial sector, as emphasised by my colleagues on the FPC and internationally in the FSB. But that is for the future. Right now, we are dealing with the problems that pose an immediate threat. The intervention announced yesterday by the Bank is intended to facilitate an orderly adjustment in the positions and structures that were threatening to generate dysfunction in that market segment. By acting in the gilt market to facilitate the necessary reduction of leverage – or at least creating an environment where that reduction can take place – the Bank is preventing a self-sustaining vicious spiral of collateral calls, forced sales and disappearing liquidity from emerging in a core segment of the financial markets. Restoring market functioning helps reduce any risks from contagion to credit conditions for UK households and businesses. The intervention is targeted specifically at that market segment where problems were emerging. And it is time-limited, because the Bank buys assets in order to sell them on afterwards, thereby helping the orderly re-shuffling of holdings of and exposures to longer-dated gilts that needs to  Page 4  take place. These operations do not create central bank money on a lasting basis.

Finanstilsynet (the Financial Supervisory Authority of Norway), for example, sets limits on the size of a single loan in relation to the collateral provided. Another possible measure is to set minimum requirements for the risk weights banks can use in their internal model-based approach to calculating capital adequacy. 46  As an extraordinary measure, in connection with the establishment of the swap facility, 2- and 3-year fixedrate loans specially designed for small banks were allotted. This was extensively explained in the Storting documents. 47  See also Peter Stella: “Minimizing Monetary Policy”. Paper presented at the Annual General Meeting of the Bank for International Settlements in June 2009. http://www.bis.org/events/conf100624/stellapaper.pdf  48  The mechanism in known in economic theory, see the Modigliani-Miller theorem. BIS Review 154/2010  15  In other countries the procedures are now being revised to allow central banks to participate when such discretionary measures are implemented. In Norway, Finanstilsynet is highly competent in the oversight of individual institutions. However, Norges Bank has more competence in macroeconomic matters, given its tasks. The central bank also has an informational advantage as we are the bankers’ bank and operate in foreign and domestic markets. The division of responsibility should be based on the advantages specific to each organisation. The Ministry of Finance should define the objective of macroprudential supervision and delegate its use. The Ministry must also assess whether the objective has been achieved. One alternative is to delegate responsibility for implementing discretionary measures against systemic risk to Norges Bank.