paul tucker : the repertoire of official sector interventions in the financial system – last resort lending, market - making, and capital remarks by mr paul tucker, deputy governor, financial stability, of the bank of england, at the bank of japan 2009 international conference “ financial system and monetary policy : implementation ”, bank of japan, tokyo, 27 - 28 may 2009. * * * everything – and i mean everything – about central banking stems from our liabilities being the base money of the economy. from this flow our roles in monetary policy and financial stability. and, in consequence, the manner in which central banks supply our money – overnight, intra - day, and for term maturities ; in routine and in various stressed circumstances – just could not matter more, even if much of the time it seems like an obscure corner of the financial system ’ s plumbing. about half a decade ago, i set out the thinking that underpins the bank of england ’ s management of our balance sheet, focusing principally on the implementation of monetary policy. 1 today i want to explain how, over the past eighteen months, we have developed our system for providing liquidity insurance to banks in the interests of preserving financial stability ; and how that bears on the prudential regulation of banks ’ liquidity. from that discussion of lolr as bagehot would have recognised it 2, i shall go on to air some developing thinking about two other instruments available to the authorities to address financial system distress : market maker of last resort, and capital of last resort. the implementation of monetary policy in stressed conditions most of the time, central bank operations revolve around the implementation of monetary policy. for the bank of england, in routine circumstances that means, of course, establishing overnight money market interest rates in line with the monetary policy committee ’ s policy rate ( bank rate ). it is vital that we should be able to achieve that primary rate - setting objective in stressed conditions, as well as in peacetime. since mid - decade, the reserves part of the bank of england ’ s operational framework has, accordingly, made explicit provision for three broad types of contingency : a bank finding itself temporarily short of reserves at the end of the banking day due to technical problems or frictions in the money markets ; a widespread shock to the sector ’ s demand for reserves ; and, thirdly, a pronounced shift in the degree to which banks collectively find themselves needing to manage their reserves directly with the bank rather than via the money

provide 3 - year financing, via a collateral swap, for assets that had become illiquid as a result of the crisis. 20 how the facilities can work in extremely stressed conditions monthly, wide - collateral repos for a 3 - month maturity and typically of fairly modest size, together with a continuously available window for 30 - day collateral swaps, are now permanent features of the bank of england ’ s regime. various parameters can be adapted in the face of extremely stressed conditions of the kind we have been facing. thus, the widecollateral repos have been held fortnightly rather than monthly, and for very large sizes. and the dwf currently offers a 12 - month swap option, as well as the standard 30 - day facility. in summary, by providing liquidity insurance the bank aims effectively to give essentially sound banks and others time to address the problems created by stress, and for the authorities to develop remedial plans, without creating perverse incentives or exposing itself to risk. given those aims, banks must avail themselves of these facilities. we believe, for example, that all qualifying banks and building societies should sign up for the discount window facility ; that they should pre - position with us a range of eligible collateral, so that they avoid operational stumbles when they seek to use the window ; that they should use it regularly in meaningful size as part of testing and making a reality of their contingency plans ; and that they should share those plans with the bank, which, amongst other things, would help us assess applications to draw. in that way, the dwf can truly help to underpin the system ’ s liquidity in the future. see tucker pmwt ( 2008 ), “ the structure of regulation : lessons from the crisis of 2007 ”, a speech to the lse ’ s financial markets group conference ; and the committee on the global financial system, paper no. 31 ( july 2008 ), “ central bank operations in response to the financial turmoil ”, cgfs papers, bank for international settlements. the sls was introduced in april 2008 and was open until end - january 2009. it enabled banks to swap legacy illiquid securities ( principally rmbs and covered bonds ) for uk treasury bills for a period of three years. the bank announced in early february that it lent £185bn of tbills, against £287bn ( nominal ) of collateral. prudential regulation of banks ’ liquidity : how it relates