As the scale of the Bank’s balance sheet persisted however, it became increasingly clear that we needed to do more to bring our risk framework up to best practice. That was for three main reasons, each linked to the drivers I listed a moment ago. First, the increasing complexity of the Bank’s operations meant that we needed more effective ways to measure the risks we were taking, add them up across the different specific operations, and evaluate them against an explicit statement of the Bank’s risk tolerance. Second, the increasingly contingent nature of our risks meant we needed much better forward-looking tools for evaluating how those risks might crystallise in different scenarios, and ensuring we had sufficient resources to respond. And, third, the need to hold ourselves accountable, identify potential blindspots and safeguard against groupthink in our internal work, required more effective internal challenge and reporting mechanisms. In the summer of 2015, we therefore set up a brand new second line financial risk challenge function, staffed using some of our risk experts who previously helped the PRA to challenge commercial banks: bringing the ‘Golden Rule’ to life. We developed a framework of risk tolerance, measurement, assessment, reporting and challenge tools across the full range of credit, market, counterparty and liquidity risks facing the Bank, basing 6  More details on these functions are available in the Bank’s annual report on the Sterling Monetary Framework, available at http://www.bankofengland.co.uk/markets/Documents/smf/annualreport16.pdf. 7  All speeches are available online at www.bankofengland.co.uk/speeches  7  them where possible on industry best practice.
More recently, the balance sheet expansion has primarily reflected outright asset purchases and long-term lending schemes of unprecedented scale and duration, designed to deliver monetary stability when interest rates are close to zero. Other major countries have seen increases of similar scale: Chart 3 for example compares the expansion in the Bank’s balance sheet with that of the US Federal Reserve. These expansions, though primarily focused on maintaining monetary rather than financial stability, are arguably further examples of the central bank as firefighter: injecting liquidity when other market-based channels are blocked. Chart 4 shows how closely the increase in the size of the Bank’s balance sheet mirrors the decrease in the scale of sterling lending to households and firms by UK banks in recent years: a strikingly similar picture to the stylised relationship in Chart 1. 3  For a discussion, see for instance Ian Plenderleith’s Review of the Bank of England’s Provision of Emergency Liquidity Assistance in 2008–09 (http://www.bankofengland.co.uk/publications/Documents/news/2012/cr1plenderleith.pdf). 4 See John, S, Roberts, M and Weeken, O, ‘The Bank of England’s Special Liquidity Scheme’ (http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/qb120105.pdf ). 5  All speeches are available online at www.bankofengland.co.uk/speeches  5  Chart 4: UK central and commercial bank  Chart 5: Permanent shift in the Bank’s firefighter role?