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

lending, is private sector savings, whether channelled through retail or wholesale markets. a central bank does not have access to those private sector savings. the grey area is that short - term liquidity support, in size and continually rolled over, looks and acts a lot like funding. that is why the special liquidity scheme was designed to lend against legacy assets only and one of the reasons why the bank has been so determined that it will end as scheduled. suppose the scheme were to be rolled on indefinitely. what was intended and designed as system - wide central bank liquidity support would become instead a fiscal operation. we would be using government debt – and hence public money – to subsidise a group of private sector firms, with the public purse being at risk. there are serious political choices here, and they are not for the central bank to make. i have set out in this talk many of the things that a central bank can do with its balance sheet. it can create central bank money, and does so in implementing monetary policy. it can also support financial stability. the bank can use its operations to distribute money around the banking system when the inter - bank market is not operating properly. and it can provide emergency short - term liquidity support for the system or individual banks under operational and market stress by changing the size, the maturity and the type of collateral taken in its operations. and can even supply foreign currency in extremis. but, being without access to private sector savings, the bank can not provide sustained, medium - term funding for banks, nor lend directly in size to the non - financial sector on a sustained basis. more information is available at http : / / www. fsa. gov. uk / pubs / international / uk _ rcb. pdf. credit supply and syndicated loans finally, and especially given the nature of this conference, i want to touch on the supply of credit more generally. despite various forms of support from the bank of england and from government, it is clear that the lending capacity of the banking system, in the uk and elsewhere, is impaired and will take some years yet to recover. some banks need to continue de - risking and de - leveraging. others, including new banks, are likely to grow. but the supply of bank lending to businesses during the recovery is likely to be more expensive than it was pre - crisis and possibly constrained in quantity. in 2009 we saw one of the consequences, with a record year for sterling corporate