But I do think there are some lessons that can be learned from the overhaul of central bank liquidity facilities that could be applied to the provision of liquidity insurance to sovereigns. What would the equivalent enablers be for sovereigns? (i)  Better surveillance, particularly of the vulnerabilities to sudden stops;  (ii)  Stress testing countries’ balance sheets through better debt sustainability assessments; and  (iii)  Better mechanisms for reducing disorderly spillovers. Surveillance The Bank of England’s Sterling Monetary Framework 11 is available to banks and building societies on a presumptive basis – banks with a genuine short-term liquidity can rely on it when a shock hits. A key part of that access is the agreement of supervisors that firms meet micro prudential standards. By contrast, there is no system of pre-qualification for the IMF’s precautionary liquidity facilities, at the margin discouraging sovereigns from relying on the IMF  9  Although I note the governance implications of capital market borrowing need further thought. 10  See Winters (2012). 11  Further information on the Bank of England’s Sterling Monetary Framework can be found here: http://www.bankofengland.co.uk/markets/pages/money/default.aspx. BIS central bankers’ speeches  5  as a form of insurance. One potential means of giving countries greater incentives to rely less on self-insurance could be to offer pre-qualification on the basis of strong economic fundamentals and policy track records as part of the Article IV process of surveillance, on a confidential basis.
The domestic financial safety net  Before turning to the global safety net, let me first say a few words about how the financial regulatory reform agenda in the UK has enabled the strengthening of the domestic safety net – the provision of liquidity insurance to the financial system by the central bank. Since the onset of the financial crisis, to keep the financial system open for business, central banks have used their balance sheets as never before. At the Bank of England, for example, new published liquidity facilities have been introduced that extend liquidity for longer durations against expanded sets of collateral to new counterparties. 5 As with any kind of insurance, however, liquidity insurance creates incentives to take more of the insured risk. The extent of this moral hazard and how best to tackle it was a key concern for the Bank of England when making these changes – it is not the role of the central bank to lend to insolvent institutions. 6 To that extent, the expansion of the provision of liquidity insurance was enabled by reform to the regulatory framework for banks, including: (i)  Micro prudential supervision that raised the levels and quality of capital and liquidity banks are required to hold;  (ii)  Regular, transparent stress testing to ensure an ongoing assessment of solvency under different scenarios;  (iii)  A credible resolution regime for insolvent banks that reduces contagion to the wider system and the need for taxpayer support.