a central bank do with its balance sheet to support financial stability, independently of those monetary policy decisions? that ’ s the question that i want to focus on in the rest of this talk. the nature of a commercial bank ’ s business fundamentally involves maturity transformation. customer deposits may be available for instant withdrawal while bank lending to corporate and households tends to be committed, potentially for many years. as a result, banks typically run significant liquidity risks. the provision of a central bank reserves account helps commercial banks to manage their liquidity risk, by allowing them meet their ordinary payments needs, including normal intra - day variations. but at times, even a well - run bank can suffer an unexpected shortage of liquidity. to mitigate that risk, the central bank provides back - stop liquidity insurance to both individual institutions and to the system as a whole under stress ( as in the aftermath of lehman ’ s collapse, reflecting a system - wide increase in both credit and liquidity risk ). the objective is to reduce the cost of liquidity disruptions for solvent and viable institutions and so maintain the flow of payments services of the uk financial system. but in meeting that objective, the bank must ensure that it guards against moral hazard, by setting the incentives in such a way that discourages anything but exceptional use of our facilities, and that it adequately protects its own balance sheet from risk of loss. 5 operational standing facilities the process of reserves averaging should deal with small unexpected liquidity shortages or long positions. for larger shocks, the most immediate short - term form of liquidity insurance is the bank ’ s operational standing facilities which, as well as helping keep short - term interest rates close to bank rate, can help individual firms cope with frictional stress such as operational disruptions and short - term volatility in market interest rates. under these since lending to the bank is free from credit risk, it is the secured overnight rate – up to the next mpc decision date – that should be broadly in line with bank rate. the intention is to avoid a firm drawing on publicly - provided liquidity support mechanisms if they actually have a fundamental problem of solvency or viability. but liquidity risk can never be completely distinguished from solvency risk at a point of stress. facilities, reserve account holders can deposit with, or borrow from the bank overnight for unlimited amounts at a penalty to bank rate. 6 open market operations the bank ’ s open market operations ( omos ) take the form of reverse repo

for us quantitative easing, which started at a time when there remained significant scope for domestic credit spread compression, and that it involves both domestic and international rebalancing. interestingly, both measures – forward guidance and asset purchases – have been reinforced by the fact that the effective lower bound has proven to be slightly negative. when policy interest rates reach zero, even with credible forward guidance the term structure can steepen as markets anticipate that future short - term rates can only rise. if however they can be convinced that the lower bound for short - term rates is not zero but can be made negative, then the probability distribution of future rate movements changes. after we introduced our negative deposit rate last year we saw long - term interest rates starting to flatten. the probability distribution of future eonia rates ( with the forward rate standing at – 15 basis points at end - 2015 ) indeed includes an expectation that our deposit facility rate can be lowered further. a negative deposit rate can also complement our asset purchase programme by inducing banks which are selling securities to the eurosystem, and receiving bank reserves in return, to lend on those balances. it compensates the lack of capital relief for banks in a regulatory environment which treats government bonds as risk free. in this way it can increase the velocity of circulation of reserves and accelerate the portfolio rebalancing transmission channel. as you know, this combination of measures has created strong price effects in certain asset markets, going beyond what many observers initially anticipated. german yields, for example, were briefly negative out to around the 8 - year maturity point and were below the deposit rate until almost the 4 - year maturity. we have always stressed, however, that the objective of our programme is to influence prices but not to impair price discovery. for this reason i do not see the recent reversal in the price of bunds and other sovereign bonds as a cause for concern, insofar as it reflects a market correction, recreates two - way risk in the market and reflects the fact that, as our programme takes effect, some of the more pessimistic assumptions of future growth and inflation trends are being revised. it is the rapidity of the reversal that worries me more. after several similar episodes, it is yet another incident of extreme volatility in global capital markets showing signs of reduced liquidity. 5 against this background, we are also aware of seasonal patterns in fixed - income market activity with the traditional holiday period from mid - july to