This package included a reduction in Bank Rate to a new low of 0.25%, and the launch of a Term Funding Scheme to reinforce the pass-through of this cut, alongside a £ increase in our stock of UK government bonds and the purchase of up to £ of investment grade non-financial corporate bonds. As central bankers and money market enthusiasts know, the issue of pass-through is of utmost importance. The paper begins with the premise that a necessary condition for competitive money markets is that any change in the Fed’s policy rate is passed through, one for one, to all market transaction rates. In truth, one can make the much broader statement that the very efficacy of monetary policy and its usefulness as a tool for influencing the economy is premised on the pass-through of changes in policy rates to money market rates. And that’s why some of us have endless appetite to discuss any wedge between them. With that in mind, I’d like to pick up on two of the central themes of Darell and Arvind’s paper. •  The first is the impact of regulation – in particular the leverage ratio – on money market function. I will restate the case for having a leverage ratio, but will also argue that it can be much improved by the exclusion of central bank reserves from the exposure measure. •  The second is the role of central banks in money markets.
•  If central bank reserves are included in the leverage exposure measure, banks must think carefully before accepting a deposit. If it implies an increase in their overall asset size, their leverage capital requirement will increase commensurately, and that will bring a shadow regulatory cost of the same order of magnitude as those calculated in the paper. This disincentivises competition for deposits, and drives a wedge between the central bank policy rate and rates that banks will pay on wholesale deposits. •  If central bank reserves are removed from the exposure measure it instantly gives banks somewhere to place cash without impacting their leverage ratio. They would therefore maximise profits by competing for deposits at rates all the way up to the rate that can be earned on reserves at the central bank, thus improving passthrough to average bank deposit rates and strengthening the transmission of  2  For example, IMF (2009) and Aikman et al (2014), and others. BIS central bankers’ speeches  3  monetary policy to the real economy. And the early indication from market participants is that they do indeed expect this change to strengthen the link between money market rates and Bank Rate. In short, although regulatory innovations such as the leverage ratio are here to stay, we can and should attenuate some of their impact on money market function where it is possible to do so without reducing the financial stability benefits.