are bad enough, the central bank will inevitably lend to solvent and viable firms against a very wide range of collateral. since we will end up doing so, it is wise to acknowledge that in advance. but, crucially, it is also wise to set the terms so as to avoid subsidising or encouraging imprudent liquidity management by firms in normal circumstances. that is one of the principles which underpin the bank of england ’ s own new, permanent liquidity facilities introduced just over a year ago. the other principles are that : • our liquidity insurance should absolutely not cut across monetary policy. • in lending against a wide class of collateral, the central bank must apply appropriate haircuts, and must be capable of valuing the assets and of managing them in the event of a counterparty default. our haircuts are published and include various addons for particular risks. and the underlying assets accepted as collateral should have a viable underlying market. • as a means of effecting the delivery of insurance, secured loans ( repo or collateral swaps ) are preferable in most circumstances to outright purchases, as during the life of a loan central banks can update the value of the security, the collateral margins and other terms that control the risk to them. • such lending against wider collateral should routinely be for sufficiently long maturities to help forestall panic by avoiding rollover risk for the firms without exposing central banks to risk by tying them in for unduly long periods. • permanent facilities providing bilateral liquidity insurance should routinely be made available only to commercial banks ( and other authorised deposit takers ). they unavoidably need such insurance because their deposit liabilities are money, giving them a vital role, as monetary institutions, in the economy and financial system. • but such public facilities should not be available to banks where in the judgment of the central bank there are serious question - marks over their viability or solvency. ( as i shall discuss later, that need not exhaust our menu for providing liquidity to individual firms in support operations. 1 ) but the most vital principle is to avoid creating perverse incentives for banks to take excessive liquidity risk. there are two elements to this. one is the importance of the regulatory regime : making banks hold a minimum stock of truly high - quality liquidity. internationally, the basel committee on banking supervision and, in the eu, the committee of european banking supervisors are working on that. in the uk, the f

insurers to transfer longevity risk through reinsurance. the risk margin is our first priority as part of the solvency ii review. we are working in eiopa to achieve a sensible outcome. to be clear, though, we are not opposed to use of longevity reinsurance, including to non - uk counterparties, provided risks are properly managed. we set out our expectations in a director ’ s letter more than a year ago. it asked insurers to pre - notify the pra of new longevity risk transfer and hedging arrangements, including the insurer ’ s proposed approach to risk management. we consulted on the content of the letter and published supervisory statement 18 / 16 on ‘ solvency ii : longevity risk transfers ’. this allowed us to track activity and has been a source of useful information to supervisors. our supervisory approach has not changed since. through a programme of in - depth supervisory reviews, we are gaining assurance on insurers ’ risk management. we will then review our expectation to be notified ahead of transactions. with insurers transferring more longevity risk and the associated returns, the profitability of writing annuities depends increasingly on the mix of assets chosen to back them. yields on government bonds are low and spreads on corporate bonds narrow. insurers are therefore searching for yield in less liquid, direct investments. these include equity release mortgages, commercial property and infrastructure financing. based on supervisory information, around 25 % of annuities are backed by such direct investments currently. but insurers have plans for that proportion to increase to 40 % by 2020. these assets can be a good match for long - term annuity liabilities. moreover, increasing investment in real assets may have wider economic benefits. however, they often lack observable market prices and external credit ratings. it is therefore more source : record of the november 2016 financial policy committee meetings published 6 december 2016 http : / / www. bankofengland. co. uk / publications / documents / records / fpc / pdf / 2016 / record1612. pdf http : / / www. bankofengland. co. uk / pra / pages / publications / ss / 2016 / ss1816. aspx all speeches are available online at www. bankofengland. co. uk / speeches difficult for insurers to assess credit and other risks. investing in and managing these assets also requires different skills. for example, when bonds are downgraded