was for the chancellor to announce a government guarantee of the deposits of northern rock, which today was extended to new depositors as part of the continuing stabilisation plan for the business. so what are the main lessons for us from the recent episode? time will provide an opportunity for deeper reflection, and it is important that careful thought does come before action. but i would identify three lessons. first, liquidity should be central to the regulation of banks. regulation worldwide has paid insufficient attention to liquidity, focussing instead on capital. northern rock did not face a problem of inadequate capital. but it was vulnerable to a shock that reduced the liquidity in markets for securitised mortgages. banks need to face the right incentives to manage their funding positions. smaller banks with reliance on wholesale funding should be encouraged to put in place insurance. we should not, however, expect regulation alone to solve this problem. that is why i think it is so important to create the right incentives. second, the single largest impediment to dealing with northern rock was the absence of a mechanism for intervening pre - emptively in a bank in trouble to separate the retail deposit book – the insured deposits – from the rest of the bank ’ s balance sheet. the ability to do this is central to the way the us and other systems operate, where the authorities are obliged to step in early – “ prompt corrective action ” – to protect depositors. one tool at their disposal, currently unavailable in the uk, is a special insolvency law for banks. legislation to create the powers to deal with a bank in this way seems to me the single most important necessary reform. deposit insurance is another area that requires change. to pretend that retail depositors can be treated in the same way as unsecured creditors in a business as complex and opaque as some of today ’ s banks is wholly unrealistic. the upper limit on deposits that qualify for 100 % insurance has sensibly been raised, and the government has made clear that a longer term reform of deposit insurance is also under review. third, central banks operate as lenders of last resort. we need to be able to lend against good, albeit illiquid, collateral, and at a penalty rate, without destabilising further any bank to which we lend. reform of deposit insurance will go a long way to achieving this. but in an age of instant communications, where the news of a facility for northern rock

without being market disruptive. 4. along with the rate cuts, we infused significant quantum of liquidity through both conventional and unconventional measures to stimulate the economy, restore confidence and revive market activity, while being mindful of the need to ensure that our liquidity augmenting measures do not engender future fragilities. our liquidity measures were unique in several ways : first, liquidity was provided only through the reserve bank ’ s counterparties ( banks ) for on - lending to stressed entities / sectors ; second, asset purchase programme was for a limited period of six months and much smaller in size than advanced economies, and was confined to government securities only ; third, collateral standards were not diluted while offering lending facilities ; and fourth, loan resolution frameworks for covid - 19 related stressed assets were not open ended but subject to achievement of certain financial and operational parameters. moreover, most of our liquidity injection measures had pre - announced sunset clauses, which helped in an orderly unwinding of liquidity on their respective terminal dates without de - anchoring market expectations. overall, liquidity enhancing measures worth us $ 227 billion ( 8. 7 per cent of gdp ) were announced, of which funds availed were us $ 157. 5 billion ( 6. 0 per cent of gdp ). 5. the liquidity infusion measures were mostly concentrated in 2020 but continued in 2021 in view of fresh waves of the pandemic and the fragile nature of economic recovery. nevertheless, surplus liquidity was gradually migrated from the short end to the longer horizon during 2021 through variable rate reverse repo ( vrrr ) auctions of longer tenors, which lifted short - term rates from ultra - low levels, thereby obviating financial stability challenges. this was done by sensitising the market well in advance through effective communication. further, recognising that the yield curve is a public good, the benefits of which accrue to all, we undertook outright asset purchases and operation twist1 – which were generally liquidity neutral – to modulate long term g - sec yields. this, in turn, lowered rates on all instruments benchmarked to prices of the g - sec yield curve. the resultant congenial conditions allowed corporates to mobilise large resources and repay high - cost debt from banks. such deleveraging by corporates reduced their balance sheet 1 open market operation involving simultaneous sale of short - term government securities and purchase of long - term government securities.