ways to transact more efficiently while staying within the letter and spirit of the regulation. as the paper describes, opportunities for netting could be further increased were a greater proportion of repo transactions to be centrally cleared – around 10 % of us dollar repo transactions are currently cleared centrally, compared with 45 % in sterling, and 65 % in euro. 1 dealers may improve the optimisation of their balance sheets across the whole group, better allocating leverage headroom in one part of the business to more leverageconstrained activity in other parts of the group. and over time new approaches to intermediation could emerge – some exchanges are exploring platforms to allow end users of the repo market ( such as pension funds ) to transact directly with one another. however, such innovations and adjustments will only ever provide a partial offset to the underlying changes. and darell and arvind are right to say that regulation bears a social cost by increasing segmentation and reducing incentives to compete, search and match in money markets. but it would not be right to then conclude that the framework of regulation that was introduced following the crisis represented a net cost to society. would it really be desirable to return to a world in which, as pozsar ( 2016 ) put it, the quantities traded were “ endless ”, and the impact on balance sheet “ an afterthought ”? the role of the leverage ratio given that i am a member of the financial policy committee ( fpc ), which has been one of the architects of the post crisis regulatory framework in the uk and put a leverage ratio in place in 2015, you probably won ’ t be surprised to hear that i support the existence of the leverage ratio. remember that over the period from 2000 to 2007 around a quarter of dealers held less than enough equity to absorb losses worth 2 % of their assets. that was facilitated by an over - reliance on risk weighting, which tended to place too much weight on periods of stability and too little on periods of underperfomance. it ’ s now clear that in the years before the crisis banks were underpricing the use of their balance sheet, and that the dispersion of rates in money markets probably underestimated the true real marginal cost of intermediation. source : federal reserve bank of new york ( https : / / www. newyorkfed. org / medialibrary / microsites / arrc / files / 2016 / arrc - roundtable

lot more reserves in the system than before, and that regulation has reduced the incentive to arbitrage small differences in money market rates. as the paper sets out, the fed ’ s rrp is a good example of adapting to this new reality. the facility improves pass - through efficiency by offering a risk - free asset to a broad range of counterparties that extends beyond banks, thus strengthening the floor on money market rates more generally. the counterpart to this facility in the uk is our ability to issue bank of england bills, though thus far we haven ’ t had the need to do so : since we began paying bank rate on all reserves in 2009 the wedge between overnight unsecured money market rates and bank rate has averaged 4bps, and the standard deviation also been 4bps ( chart 6 ). another example of changing the way we operate was our decision in 2014 to grant broker dealers access to reserve accounts at the bank of england for the first time. second, empowered by strengthened regulatory frameworks and resolution regimes, we have reaffirmed our commitment to abide by bagehot ’ s 19th century advice that the best way to avoid a panic is to “ lend freely and vigorously... on all good banking securities. ” for example, shortly after the result of the uk ’ s referendum on eu membership was declared we made clear that banks already had collateral positioned with us such that they could borrow more than £250bn, and announced that our regular liquidity auctions would continue to run on a weekly basis throughout the summer. coupled with banks ’ own strong internal liquidity positions, this has helped ensure the smooth functioning of money markets. and overnight market rates have stayed close to bank rate throughout the period since the referendum. third, we have taken steps to ensure that the vital infrastructure of money markets continues to remain effective. the work on risk - free benchmark rates being undertaken by both the federal reserve and the bank of england is a good example of this. building on recommendations made by the fsb 3 – which drew on the findings of a market practitioners group chaired by darell – both central banks have convened working groups of market participants with the aim of identifying benchmarks of nearly risk - free reference rates that could that could sit alongside libor. 4 and both have taken steps to improve the resilience and coverage of overnight unsecured benchmark rates – the bank of england by taking over the reforming major interest rate benchmarks – july 2014 http : / /