(ii)  It was also difficult to decide the appropriate spread to charge for lending against wider relative to narrow collateral, to mitigate adverse selection and the moral hazard risk. A minimum 50 basis point spread was applied for wider collateral. (iii)  Those long-term repos exposed the Bank and the commercial banks to significant interest rate risk. That is because commercial banks’ reserves balances were being remunerated at Bank Rate but the minimum bid rate in the LTRs was the fixed  10  The narrow and wider collateral sets were redefined in February 2011. The changes will take effect from 1 July 2011. See http://www.bankofengland.co.uk/markets/marketnotice110211.pdf for more details. 11  For more information about changes in the Bank’s balance sheet in response to the crisis, see Cross and Fisher, “The Bank’s balance sheet during the crisis”, Bank of England Quarterly Bulletin, 2010 Q1. 6  BIS central bankers’ speeches  3-month market (OIS) rate at the time of the operation (plus the spread for wider collateral). So when Bank Rate was cut much more rapidly than was anticipated by the market during Autumn 2008, the Bank recorded a large, unintentional surplus (and the banks a corresponding loss).12 In order to try to resolve these issues, the Bank enlisted the help of Paul Klemperer from Nuffield College, Oxford, an expert in auction theory, to help re-design its long-term operations.
”These words of Caffè do not surprise those who knew him and those who have read his works. They express the fundamental inspiration of his professional and public life: it is a duty of economic policy to act so that the economy can get as close as possible to full employment. In 1975, he formulated it more precisely: “The goal of dignified work for all, however, is not compatible either with situations of privilege, which have now become destabilising, nor with excessive labour and social security rights, which results in job opportunities evaporating away”. The issue that Caffè raises here is one of fairness. We find it again today: the international crisis has affected everyone, and young people especially. In the European Union, between 2007 and 2011 the unemployment rate rose by 5.8 percentage points among the 15–24 year olds, by 3.5 points among the 25–34 year olds and by 1.8 points in the 35–64 age range. Qualitatively, the profile is similar almost everywhere; the clear exception is Germany, where the unemployment rate among 15 to 24 year olds in the first quarter of 2012 was 8%; in Italy it was 34.2%, in Spain 50.7% and the euro area average was 21.9%. These trends reflect a fundamental question: they confirm the particular vulnerability of this essential part of our workforce.