The first is that central banks use their balance sheets not, like commercial banks, to generate economic returns for their shareholders, but to deliver the policy goals of monetary and financial stability. That may sound innocent enough: dull even. But that would be misleading – because  2  All speeches are available online at www.bankofengland.co.uk/speeches  2  maintaining stability means central banks must be prepared to act like financial firefighters – rushing into burning buildings (taking on certain types of financial risk) when everyone else is rushing out. That dynamic is clearest when central banks act as lenders of last resort: stepping in to provide temporary liquidity (to individual firms, or the market as a whole) when private liquidity providers take fright. They are uniquely able to do this because their ability to create fiat money means they face no liquidity risk in their own currencies of issue. Of course, central bankers go to great lengths to limit the other forms of risk they take on in such circumstances: lending only to institutions assessed as solvent and viable; taking high-quality collateral, with conservative haircuts; charging suitably penal interest rates; and typically lending only for limited periods. But they can still find themselves lending, sometimes in large size, when everyone else prefers not to, in order to limit the financial instability that would be caused by wider contagion. That inversion of the normal definition of risk tolerance – illustrated schematically in Chart 1 – is strike one against the risk professional’s standard operating manual.
11 / 12  BIS central bankers' speeches  I would like to make a final comment on the effects of our APP portfolio on bond yields. While, overall, our APP portfolio will continue to exert downward pressure on euro area long-term interest rates, other factors such as economic fundamentals and the creditworthiness of issuers, as assessed by market participants, remain key determinants of the levels of bond yields and spreads. Conclusion The winding-down of net asset purchases is not tantamount to a withdrawal of monetary policy accommodation. The ongoing rotation from net asset purchases towards enhanced forward guidance on key ECB interest rates has preserved the ample degree of monetary policy accommodation that is necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term. Prudence, patience and persistence will continue to inform our policy decisions. The sizeable stock of acquired assets and the associated reinvestments, as well as the strong anchor for policy rate expectations provided by our enhanced forward guidance, will continue to deliver the monetary policy stimulus necessary for inflation convergence. In any event, all our policy instruments can be adjusted to ensure that inflation moves towards our aim in a sustained manner. 1 This speech builds on my remarks at the UBS Conference, London, 13 November 2018. 12 / 12  BIS central bankers' speeches