banking worked as serenely as i have described so far. but, of course, that would be too good to be true. there are risks, there are tools to deal with these risks, and yet occasionally, there are banking crises. so let me turn to these next. what are the risks from maturity transformation and how can a bank manage them? what if by coincidence, the bank receives a series of withdrawal requests at once. there could be an epidemic in the area of its operations ; may be the bank serves a community that is buying a lot of gold for akshaya tritiya ; or there is a wealth shock to the farming community it serves due to poor monsoon and new deposits do not come in at the expected rate. in such a scenario, when many depositors need to withdraw their monies at once, the bank faces risk from maturity transformation. given the coincident money demand, it is no longer sufficient to simply manage deposit withdrawals with new deposits and repayments on existing loans. what options does the bank have to manage these risks to ensure that it will show the money to its depositors when they need it and thus retain their trust? to this end, let me briefly introduce three concepts : bank liquidity, bank capital, and interbank markets. bank liquidity one simple idea is that a bank need not deploy all of its deposits for extending bank loans. it can save some purely as a reserve or a buffer to meet the unexpected coincidence in deposit withdrawals. the benefit of such bank liquidity is that it is an impeccable defense as long as withdrawals are smaller than the size of the reserve. the cost is that by not being able to extend bank loans on part of its deposits, economic activity is compromised. bank capital another idea is that a bank need not fund its extension of bank loans only with deposits in its liability structure. it can also raise some other forms of non - demandable liabilities. for example, the banker can put his own capital, beyond the savings needs, into the bank. a large bank can also raise public equity by being listed on a stock exchange. this way, the impact of the bank ’ s unexpected deposit withdrawals can be made smaller relative to the overall size of the bank and the loan repayments it receives. such bank capital would be supported through profits that a bank makes, by charging loan rates that exceed deposit rates and net of the costs of its operations. bank capital would then be the first

size of daily operations, launch timing and duration of the facility, and pricing – relied on detailed and ongoing qualitative, as well as quantitative, market intelligence. in terms of the intervention tool itself, we would have much preferred to rely solely on collateralised lending. but this wasn ’ t viable, for the simple reason that there was no - one either willing to, or capable of, borrowing from us at sufficient speed to staunch the firesale dynamic. the ldi funds themselves needed less leverage not more. the pension funds that invested in the ldi funds had collateral, but many lacked the ability to borrow, and anyway were too numerous and preoccupied in time - consuming processes aimed at reaching formal decisions as to whether to recapitalise their investments to act at the speed required. we had many ways to provide liquidity to the banks, [ 12 ] but they were already flush with liquidity, and no better placed than we were to pass liquidity on, either to pension schemes or ldi funds. [ 13 ] in the circumstances we faced, therefore, a buy / sell tool proved the only way to stop firesale dynamics in a timely manner ( figure 3 ). this is clearly not where we want to be in the steady state. collateralised lending programmes targeted directly at an appropriate set of non - banks would be materially less risky, to public money and to market incentives ; they would pose fewer potential conflicts with monetary policy ; and could be put in place ahead of potential shocks, with well - understood operational, collateral and pricing terms. developing viable options for such facilities is therefore a high priority on our work programme. there are at least three key sets of operational design questions to tackle. first, which non - banks do you need to be able to get liquidity to, in order to stem potential systemic shocks effectively? second, are those non - banks able to borrow ( or can we devise mechanisms to allow them to do so ), both in terms of their legal remits, and in terms of their operational arrangements? and, third, what terms and conditions would we want to impose on borrowers, including pricing, collateral requirements and any access conditions – including regulatory status? i have to say that my instincts are that finding a workable group of non - bank entities that are ( a ) collectively systemically important enough to allow us to maintain stability, ( b ) legally and operationally able to borrow at sufficient size and speed, and ( c )