It enabled banks to swap legacy illiquid securities (principally RMBS and covered bonds) for UK Treasury Bills for a period of three years. The Bank announced in early February that it lent £ of TBills, against £ (nominal) of collateral. 8  BIS Review 67/2009  Prudential regulation of banks’ liquidity: how it relates to central bank liquidity insurance But such insurance is not and cannot be a source of longer-term funding to the banking system. Prudent valuations and haircuts mean that our insurance cannot finance anything like the whole of a bank’s balance sheet even in the short run, and also that banks need a clear buffer of surplus capital. Nor is central bank liquidity insurance always going to work. That underlines why prudent liquidity management must be a major responsibility of the banks themselves. In the normal course of their business, they should insure themselves against liquidity risk in private markets. They can do so by, for example, holding a stock of assets that can unquestionably be exchanged readily in the financial markets for cash in anything other than the gravest market distress; by maintaining funding with a prudent maturity structure relative to that of their assets and contingent commitments; and in the case of smaller banks, up to a point by buying insurance in the form of completely committed lines of credit from larger banks, but also crucially by holding unquestionably liquid assets in case their bank-provider is ailing when they call on the line.
Paul Tucker: The repertoire of official sector interventions in the financial system – last resort lending, market-making, and capital Remarks by Mr Paul Tucker, Deputy Governor, Financial Stability, of the Bank of England, at the Bank of Japan 2009 International Conference “Financial System and Monetary Policy: Implementation”, Bank of Japan, Tokyo, 27-28 May 2009. *  *  *  Everything – and I mean everything – about central banking stems from our liabilities being the base money of the economy. From this flow our roles in monetary policy and financial stability. And, in consequence, the manner in which central banks supply our money – overnight, intra-day, and for term maturities; in routine and in various stressed circumstances – just could not matter more, even if much of the time it seems like an obscure corner of the financial system’s plumbing. About half a decade ago, I set out the thinking that underpins the Bank of England’s management of our balance sheet, focusing principally on the implementation of monetary policy. 1 Today I want to explain how, over the past eighteen months, we have developed our system for providing liquidity insurance to banks in the interests of preserving financial stability; and how that bears on the prudential regulation of banks’ liquidity.