in a special vehicle on the bank ’ s balance sheet, the asset purchase facility ( apf ). given these assets were purchased for monetary policy purposes, decisions over them are taken by the mpc according to a set of principles, including a commitment to make the process gradual and predictable, and to use bank rate as the active monetary policy tool. the mpc has also noted the benefit of building headroom should qe be needed in the future. as this qt process progresses, the gilts held in the apf may eventually fall below the pmrr. lending through the str in the first instance, and eventually alongside our other facilities, will start to pick up the shortfall in reserves supply, to meet prudential needs for reserves and maintain monetary control through the setting of bank rate. the qt process enters a new phase. qt now changes the mix of assets that back central bank reverses as the apf unwinds, but not the level of reserves itself. we face a choice at that point between providing central bank reserves above the level of the apf through repos – that is lending reserves against collateral – and outright purchases of safe assets such as gilts, or some combination of the two. for much of the bank ’ s history we have lent on a secured basis, primarily against government securities and trade bills. perhaps it is time to return to such an approach. a key consideration is how much interest rate risk – the exposure to swings in the value of assets as interest rates change – should reside on the central bank balance sheet. qe involved an increase of long - term assets, long - dated gilts, on the bank ’ s balance sheet and an increase in short - term liabilities, reserve liabilities remunerated at bank rate. this removed interest rate risk from the private sector and transferred it to the central bank balance sheet. qt is now reversing this process and unwinding the interest rate risk held by the central bank. and while we will meet the demand for reserves, it does not mean that we should retain the interest rate risk. so hand in hand with the discussion of the assets held by the central bank, comes a discussion of how interest rate risk is managed across the financial system. while outright asset purchases bring interest rate risk on to the central bank, a portfolio of repos – effectively loans against a wide range of collateral – does not. there is still some risk associated with repos – the

pay a lower interest on the minimum element. at the bank of england, as a matter of history, we do not have such minimum reserve requirements. let me conclude. we are at an important point in time for central bank balance sheets. a lot of work still needs to be done to establish future arrangements – and we are continuing that work. on a few things we can be clear. as we withdraw reserves through qt and the unwind of the tfsme, a latent demand for a standing stock of reserves will eventually be revealed. so for financial stability reasons, we think the central bank balance sheet will remain larger than before the financial crisis though not as large as today. a range of £345 - 490bn is not a bad starting point. but choices on the structure of operations will affect the size of the pmrr, and it is likely to change over time. everything here is endogenous. at the pmrr we will have headroom should we need to use the balance sheet again, and we can maintain monetary control through the use of bank rate. that leaves us with a choice of how to back central bank reserves, choices on the assets to be held and the pace of the move to a new steady state. a repo portfolio can offer a reliable and flexible source of reserves as largely additional highquality liquid assets to the system. it scores well on key principles, but some open challenges remain. we are currently reviewing whether those are best addressed via the terms of our facilities alone – such as the calibration of price, term and frequency – or whether those challenges support the case for some gilt holdings in the new steady state. in any case, we would expect a significant increase in our repo operations as we look ahead to the future, and the market should continue to ready itself for this. this stuff really is the heart of central banking. it is complicated and i am grateful for your attention this evening. i am not sure how large a room would need to be to fit in all the people who really understands the bank ’ s balance sheet. but – to be very clear – charles would be the guest of honour. i am grateful to nick butt, karen jude, rafael kinston, martin seneca, ryland thomas and jack worlidge for their assistance in preparing this lecture, and for comments and suggestions to nathanael benjamin, sarah breeden, fabrizio cadamagnani, victoria cleland, jonathan haskel, harsh