that liquidity risk resided primarily in the banking sector. but as economies migrate towards more market - based forms of finance, liquidity risk is increasingly likely to originate ( or be concentrated ) elsewhere : including broker - dealers, central counterparties ( ccps ), or traded instruments themselves. the herd mentality that can develop during crises can sometimes only be tamed by well - designed intervention – be it covert or overt – using a credible backstop. countries lacking such backstops are likely to sustain large - scale, and preventable, economic damage. so the risk of central banks having “ too little ” scope to carry out lolr is real. at the same time, the public has a legitimate interest in avoiding “ too much ” lolr. we cannot afford for financial institutions to view liquidity support as a substitute for prudent financial management : central banks must not be “ lenders of first resort ”. and lending to institutions that are in need of capital rather than liquidity is the wrong solution. given the uncertainties involved, neither outcome can be avoided with certainty. but it is right to seek robust safeguards against them. bis central bankers ’ speeches a well - designed lolr framework must therefore get the balance right between lending “ too little ” and “ too much ” : – to help avoid “ too little ” lolr, central banks must be given clear responsibilities and the tools and powers needed to carry them out, including the ability to lend to individual institutions, covertly if necessary to maintain financial stability. – to help avoid “ too much ” lolr, central banks must have strong risk management, be ring - fenced from special interests ( in public or private sectors ), have a clear public mandate specifying their scope for action, and be subject to strong transparency and accountability requirements. there are powerful parallels between these design challenges, and those for monetary policy. like monetary policy, lolr is vitally important to an economy ’ s health, but involves intrinsically complex, technical judgments – including the solvency or otherwise of potential borrowers, the pricing, scale and maturity of loans, and the appropriate collateral. it is important that these judgments are made by experts. but, also like monetary policy, the consequences of these expert judgments have potentially wide - ranging effects on society. so they should only take place within a clear public framework of delegated authority. this combination of expert discretion within public parameters is sometimes termed “ constrained discretion ”. the large scale lolr

##tated, and lead households to prioritise balance sheet repair in response10. miles and monro, “ uk house prices and three decades of decline in the risk - free real interest rate ”, forthcoming 10 for a more detailed discussion, see haldane, a. ( 2011 ), " risk off " all speeches are available online at www. bankofengland. co. uk / news / speeches and @ boe _ pressoffice to help gauge the role played by these factors, we can consider the historic relationship between house prices and fundamentals and how this relationship might have evolved in the decade since the crisis11. the blue line in chart 6 shows how we might have expected mortgage debt to evolve following the crisis, based on the historic relationship between mortgage lending and fundamentals such as the housing stock and incomes. this shows underlying demand falling in the immediate post - crisis period. this reflects weaker fundamentals. and to the extent that households ’ beliefs are shaped by recent trends – and there is good reason to believe that is the case - weaker expectations will be captured in weaker demand. this fall in demand could also reflect credit conditions. in the years immediately following the crisis bank rate remained close to zero, but the interest rate spreads over bank rate charged by banks and building societies, for new mortgages, were high. this meant that interest rates on new mortgage did not fall with bank rate. but, as is shown in chart 7, from 2013 onwards, mortgage spreads fell and the cost of mortgage credit dropped to well below pre - gfc level. i have borrowed this thought experiment from geoff meen. it makes a number of simplifying assumptions, notably that there would not be feedback from higher demand into house prices in the counterfactual in which credit is unconstrained. these simplifying assumptions mean that the analysis and resulting figures should be taken in context. all speeches are available online at www. bankofengland. co. uk / news / speeches and @ boe _ pressoffice chart 6 : mortgage debt : income chart 7 : price and non - price credit conditions percentage counterfactual actual pp spread to ois cumulated net percentage balances - 600 - 400 - 200 2y75 % mortgage spread ( lhs ) 2y90 % mortgage spread ( lhs ) availability of secured credit ( ccs, rhs ) credit scoring criteria maximum ltv the blue line represents estimated demand for mortgages and the resulting impact