A similar point can be made about debt issued under the Government’s Credit Guarantee Scheme – the Government provides a guarantee but it is still the market which buys the bonds and provides the cash. As these schemes come to an end, the challenge for the banks is not so much the sourcing of an additional quantity of funding. It is to roll over that existing market funding into different funding instruments. More generally, a central bank should not allow its liquidity operations to become, or even to be perceived as a source of sustained funding for banks or for any other form of mediumterm lending. The only medium-term source of commercial bank funding, and hence for their 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.
In consequence, other banks struggled to get the liquidity they needed via market mechanisms, particularly term borrowing, even when there was more than sufficient cash in the system as a whole and even if the firms had good quality collateral. The amounts being rolled in overnight markets became a risk in itself. The Bank responded by massively increasing its lending at three months maturity from £ before the crisis to a peak of around £ in early 2009. Essentially we chose to lend so that any bank which needed to could bid for and obtain liquidity at three months. The significant increase in term liquidity that ensued meant that there would have been downwards pressure on short-term interest rates. So in order to keep market interest rates close to Bank Rate, the Bank drained the excess liquidity via issuing Bank of England bills. At its peak, the Bank issued around £ of one-week bills. 6  Currently, the deposit rate is zero and the borrowing rate 75bps. In more normal conditions, these spreads can be expected to be symmetric around Bank Rate. 7  The Bank can choose to lend in variable rate repos. This happened for a brief period in mid-2009. 8  Again, variable rate bills could be used. This happened during the first few months of the asset purchase programme.