Between feast and famine

Ensuring central banks lend neither ‘too little’ nor ‘too much’ in pursuit of financial stability is vital if countries are to retain(lender of last resort) LOLR toolkits that can both protect their economies against genuine liquidity risks whilst maintaining broad-based public support and legitimacy. This is the conclusion reached by Andrew Hauser, executive director for banking, payments and financial resilience at the Bank of England in an address to the committee on capital markets regulation conference in Washington DC today (February 10).

In recent years, reforms to the Bank of England have focused on minimising the risk that it might lend ‘too little’, significantly increasing the Bank’s ability to provide structured LOLR assistance, to a wider range of counterparties, against a wider set of collateral, at longer maturities and somewhat lower prices. But at the same time, safeguards have also been strengthened against the Bank lending ‘too much’:  better supervisory and resolution frameworks; transparent terms for access, pricing and collateral; and stronger accountability and governance.

“The UK’s arrangements are no panacea,” he said. “The decision to lend or not to lend will always be a difficult one, conducted with imperfect information and in the midst of a crisis. Ex post judgments on whether the central bank lent too much or too little must recognise this constraint. But the UK’s experience can I hope show one way to address the risks of lending ‘too much’ through enhanced accountability whilst also still allowing central banks the ‘constrained discretion’ to exercise expert judgment in the pursuit of financial stability.”

The full text of the speech can be found on the Bank of England website.