chart 10 ). that does not exactly look like disintermediation. in a synthetic securitisation, the spv still issues ‘ cash ’ securities to its investors, but rather than investing the proceeds in the credit portfolio, it holds a high - quality liquid asset, which can be a bank deposit. it gains its credit exposure via a credit default swap. in a recent speech, rg rajan of the imf attributed the compression in risk premia to a shortage of assets. the growth in demand for synthetic exposures is consistent with that. rajan, r g ( 2006 ), ‘ is there a global shortage of fixed assets? ’ remarks at the g - 30 meetings in new york, december 2006. world broad money is a weighted average of individual country m2 or closest national substitute, using market exchange rates. included in the euro area ; partly included in japan ; excluded in the us. see box on ‘ excess global liquidity, asset prices and inflation, bank of england inflation report, february 2006, page 5. how to square this with ‘ originate and distribute ’? basically, in contrast to the pre - big bang world in the uk, today ’ s prevailing business model entails a significant commitment of capital by investment banks. this manifests itself in a wide range of on - balance sheet assets on top of the more traditional bond and equity books held as part of ‘ market making ’. for example, bridge loans are extended to finance leveraged buy - outs prior to more permanent debt instruments being placed via the capital markets. similarly, there is an intermediate stage between origination and distribution of securitised portfolios, during which they are warehoused on banks ’ balance sheets. as i just described, synthetic securitisations, by contrast, can involve investment banks permanently holding corporate bonds and loans to hedge synthetic short positions, where the risk is transferred elsewhere. and loans against a very wide range of collateral are provided to finance hedge funds20 ; this effectively amounts to writing deeply out - of - the - money options, where the risk flows back to the financer in adverse states of the world21. so investment banking does use balance sheets, but in non - traditional ways. beyond that, there is an extra ingredient for the commercial banks. as is apparent from the money numbers, they are very much still in the deposit - gathering business. on top of maintaining their central role in the payments system, this means that, even if operating an

requirements in this area vary surprisingly widely, and often for good risk or fiduciary reasons ( eg to limit managers from taking excessive leverage ). - second, eligible nbfis will need the operational and analytical capacity to execute and risk manage borrowing from the bank against gilts on a secured basis. while professional funds with existing market presence and / or funds that are part of a large investment management group may have this capacity in principle, building the necessary infrastructure could still involve material costs. we are keen to work with market participants to explore how the bank can transact in the most costeffective way with a wide range of nbfis and the complex pre - existing structures that many belong to. - on the central bank side, the key operational question is how to deal with the fact that there are vastly more nbfis than there are banks in the financial system. our sterling monetary framework currently has just under 230, primarily bank, counterparties, covering the vast majority of the total uk deposit base. but there are over 5, 000 defined benefit pension schemes alone just a small subset of the total nbfi universe. so a simple scaling of our existing operational approach is not going to be operationally feasible. one alternative would be to focus only on those nbfis most relevant to financial stability but that may not mean the largest firms, as we found during the ldi crisis when the primary source of instability arose in bank of england - 15 % of the ldi market. 21 a different so - approach would be to find some indirect way to channel liquidity to this much larger universe of firms. one option, floated in the us, would be to use a central clearing counterparty ( ccp ) to intermediate between central banks and nbfis. 22 such an approach could potentially reach many counterparties in the gilt market but the effectiveness of this model is contingent on clearing becoming more widely used by market participants in gilt repo transactions, particularly on the buy side. - at the bank of england, we will also need to be sure we can risk manage the new lending facility. at one level this may appear relatively simple if the collateral is limited to gilts. but an important question firms involved closely linked to the potential number of will be whether we also seek to manage counterparty risk as we do today, through an assessment of the potential for counterparty default. figure 5 : some operational design challenges for an nbfi lending tool operational questions nbf