After each ILTR operation, the Bank can use the pattern of bids to help assess whether the total amount on offer needs to be changed for the next monthly operation. In addition, we decided to index the clearing spreads to the subsequent out-turn for Bank Rate, with a minimum spread of zero so that there is no interest-rate risk to the Bank of England. Finally, the Bank is also able to respond to strains in short-term foreign currency funding markets, utilising swap lines with other central banks to conduct foreign currency OMOS. For example, in September 2008, the Bank, in concert with a number of other central banks, announced coordinated measures designed to address continued elevated pressures in US dollar short-term funding markets. 9  Initially the collateral list was expanded in the Autumn of 2007 and then again in Autumn 2008. 10  Our approach to risk managing these securities has been set out in the Quarterly Bulletin. See Breeden and Whisker (2010), Quarterly Bulletin, 50, 2, pages 94–103. 11  See Bank of England (2009), Annual Report and Accounts 2009. 4  BIS Review 126/2010  The Special Liquidity Scheme During early 2008, following the collapse of Bear Stearns, and with the continued closure of the securitisation markets making mortgage-backed securities and hence mortgages substantially illiquid, it became clear that additional and exceptional liquidity support would be needed for the UK banking system.
During much of this period, banks internationally were engaged in a highly competitive ROE race. Therein lies part of the explanation for these high returns to labour and capital in banking. 4. Explaining aggregate returns in banking – excess returns and risk illusion How do we explain these high, but temporary, excess returns to finance which appear to have driven the growing contribution of the financial sector to aggregate economic activity? In this section we discuss potential balance sheet strategies which may have contributed to these rents. Essentially, high returns to finance may have been driven by banks assuming higher risk. Banks’ profits, like their contribution to GDP, may have been flattered by the mis-measurement of risk. The crisis has subsequently exposed the extent of this increased risk-taking by banks. In particular, three (often related) balance sheet strategies for boosting risks and returns to banking were dominant in the run-up to crisis:   increased leverage, on and off-balance sheet;    increased share of assets held at fair value; and    writing deep out-of-the-money options. What each of these strategies had in common was that they generated a rise in balance sheet risk, as well as return. As importantly, this increase in risk was to some extent hidden by the opacity of accounting disclosures or the complexity of the products involved. This resulted in a divergence between reported and risk-adjusted returns. In other words, while reported ROEs rose, risk-adjusted ROEs did not (Haldane (2009)).