. as i have discussed there is clear evidence of changes in demand of that sort in the financial sector. but that is not the whole story. so have there been increases in supply of money and if so how will they feed through into the economy? what does a supply shock look like? it is easiest to visualise in a closed economy in which the money supply is mainly notes issued by the monetary authorities. one can imagine then a direct increase in supply – a helicopter drop of extra notes. in that world people would really find themselves with extra cash in their pockets and would be expected to go out and spend some or all of it. with more money chasing the same goods, we would see a direct impact, first on money spending, then on inflation. in the modern world the nearest equivalent to helicopter drops has been the monetary financing of government deficits. but monetary financing is not a problem we face at the moment, indeed it is not allowed within the eu under the maastricht treaty. so what we need to be concerned about today is the creation of extra money through the banking system and the way that happens is through the granting of credit to willing borrowers who borrow to spend on assets, investment or consumption. the supply changes we need to spot are changes in banks ’ willingness to lend. and we don ’ t have to look far to find some. take, for example, the growth of consumer credit in the uk ( chart 15 ). we see rapid growth in the late 90s and early years of this century followed by a sharp decline as banks began to see defaults rising. another recent example is the sub prime market in the us. chart 16 shows the arrears rates on successive cohorts of loans, marking very clearly the reduction in credit quality in 2006 as the market overshot. in both cases the figures and the market explanations confirm that these movements reflect at least in part changes in the supply curve for credit. the borrowers were willing but the banks were also pushing the supply by reducing costs and conditions ( culminating some said in ninja mortgages – for those with no income, no job and no assets ). so i have no doubt that we have seen some supply changes to credit. next we need to distinguish the sustainable changes from the cyclical. sustained changes either in the economy or in financial sector technology may justify some increase in supply. for example, we have seen a long period of low and stable inflation and unemployment and that is expected to continue.

not yet have much drawing capacity, for various reasons. so liquidity facilities aren ’ t yet a universal solution. - second, banks ’ ability, or willingness, to draw from liquidity facilities at the scale and speed of recent runs ( shown in figure 10 ) is unproven. where the constraints are technological, they should be fixable over time, given appropriate resources. but some banks still worry that investors, depositors or even supervisors may see facility usage as ‘ stigmatising ’, amplifying rather than mitigating stability concerns. great progress has made in reducing this risk in recent years, including through the development of market - wide facilities, the issuance of supervisory guidance stressing that the use of central bank facilities is part of normal liquidity management, and balanced disclosure regimes. but stigma is hard to eliminate altogether – and firms that baulk from drawing quickly and in size when a liquidity shock hits, and lack alternative sources of liquidity, are exposing themselves and the system to risk. - third, banks can only count access to central bank facilities towards their lcr requirements as and when they draw from them, adding to their reserves holdings. that means that, while there are many positive arguments for having such access, it does not absolve banks from having to make a choice between holding reserves ( however they might be supplied ) or other forms of hqla to meet the lcr. 17 bringing it together : some principles for steady state reserves supply where does this all leave us on those big questions i posed at the start? 17 the lcr rules do contain provision for ‘ contractual committed liquidity facilities ’ from central banks to be counted towards the lcr in a limited way – see option 1 in lcr31 - alternative liquidity approaches ( bis. org ). but the conditions for activating this option are demanding jurisdictions must show they have a structural shortage of domestic currency hqla, and central banks must be contractually committed to lend, and charge a relatively high fee for the facility. bank of england the marked tightening in post - gfc bank liquidity requirements and the continued growth in the size, speed and breadth of liquidity shock since then has increased the precautionary demand for reserves : the ‘ kink ’ in the reserves demand curve in figure 4 has moved decisively to the right. against that backdrop, maintaining monetary control, micro - and macro - prudential stability means supplying a materially higher standing stock of reserves than