Whereas a trawl of the web reveals over 200,000 articles referring to LOLR, there are around 1,500 mentions of MMLR, most of them published over the past year or so. 24 And like all new territory, it needs to be thought through. One recent contribution 25 suggested that if the purpose of LOLR in a bank-based system is “to stabilise the balance sheets of banks”, in a market-based system it should be “to stabilise the limit-order book, by placing orders to buy”. By analogy with the more familiar “LOLR” function, the following thoughts suggest themselves for debate in our community. First, as with LOLR, central banks cannot engage in MMLR operations if to do so would interfere with monetary policy. Securities are purchased in exchange for cash, entailing an injection of reserves into the banking system. That has to be consistent with the target for the central bank’s net supply of reserves. Second, a MMLR should aim to charge a penalty (eg buy at a discount) to the fundamental value of an asset. Put another way, any bid-ask spread should be unattractive relative to peacetime conditions in private markets. Third, any purchase (auction) mechanism should be designed to reveal information about the state of the market and the fairness of prices paid. Fourth, while the MMLR cannot avoid the risk inherent in outright purchases, it absolutely must not over reach its capital resources. Fifth, the MMLR should aim to be catalytic, helping ideally to kick-start the market rather than replace it.
Sixth, the MMLR should avoid propping up markets that would not be fundamentally viable once peacetime returns. I must stress that those are just starters for debate. But, unfortunately, we cannot always wait for consensus around fully articulated principles. Recently, in the context of its Asset-Purchase Facility programme, the Bank of England has embarked on what could, perhaps, be viewed as two variants of MMLR in the sterling corporate financing markets. Both have been focused on our being a buyer, rather than operating on both sides of the market, but arguably that is what the various MMLR ideas really amount to in crisis conditions. In the first, we offer to buy Commercial Paper at announced spreads, which are designed to be above those warranted by credit-fundamentals, and above market spreads during peacetime, but below those prevailing in the market before we stepped in. In other words, we are ready to lend without charging a hefty liquidity premium, since we are not liquidity constrained. We offer to buy paper in both the primary market and the secondary market. The latter is in effect a temporary liquidity facility to money market funds and others, at an extra cost of 25bp over the fixed spread, and with the aim of increasing their willingness to buy new paper. The goal has been to stimulate the market to bring market prices to at least our spreads, with market transactions occurring there or more cheaply.