A measure of success is not how much paper we buy, but whether providing a backstop assists the functioning of the market. The Bank’s second facility is in some ways more interesting in the context of the debate about MMLR. We are acting as a back-stop buyer of sterling corporate bonds, by regularly holding auctions in individual securities. To protect against risk, the Bank sets (and updates)  24  Many of them by Willem Buiter. 25  Cecchetti S G (2009), “Central Bank Tools and Liquidity Shortages”, Federal Reserve Bank of New York Conference, 19-20 February 2009. The quote is from the slides used at the conference. BIS Review 67/2009  11  reserve prices, which draw on CDS spreads, models of risk etc as well as qualitative information. The amounts we offer to buy in each auction are small. The objective is explicitly catalytic. It is to reduce the inventory risk run by bank market-makers in the securities, and to reduce liquidity risk for market participants more generally. Perhaps the best way to think about it in the abstract is that it is akin to our stepping into the market with a narrower bidoffer spread than private sector intermediaries would otherwise offer, with a view to those very same dealers bringing their bid-offer spreads inside ours and to investors reducing the liquidity premium they require.
Analogously, in significant degree financial stability is about safeguarding the stability of private money (deposits held by households and firms with the banking system) relative to central bank money. Depositors with banks have to be confident that they can exchange their deposits at face value for our money – our notes; or that they can smoothly transfer their deposits to other banks where they could be confident of that. Those two formulations amount to much the same thing, as transfers between banks are settled across our books in central bank money, the economy’s ultimate settlement asset. 5 At the level of the system, we need an “exchange rate” of unity between private money and central bank money. And we need wholesale funders of banks to be confident of that too. Absent that stability and confidence, the payments system and credit creation become severely disrupted, with big social costs. Of course, banks are not the only lenders in our economies. The current crisis owes a lot to the non-bank financial sector – funds, conduits, SIVs, securities dealers, and so on. But the excessive leverage and maturity transformation in the shadow banking system was in general predicated on the plentiful availability of credit on too-easy terms from the  maintenance period. For more details see paragraphs 74-81 of “The Framework for the Bank of England’s Operations in the Sterling Money Markets (the ‘Red Book’)”, Bank of England. 4  Ibid., paragraph 166.