The pre-positioning drive has gathered pace in the last year or so – there is now over £ of collateral pre-positioned for use in the DWF. After applying appropriate haircuts to each piece of collateral pre-positioned, this means the Bank could, subject to solvency and viability assessments and repayment plans, lend around £ in the DWF without the complications of further detailed collateral checks. 11 Although not a substitute for firms  9  Further details on how central banks can use their money market operations to implement monetary policy and provide liquidity support to banks are set out in Clews, Salmon and Weeken (2010), “The Bank’s money market framework”, available in the Bank’s Winter 2010 Quarterly Bulletin. 10  Further details are available at http://www.bankofengland.co.uk/markets/marketnotice100719.pdf. 11  That is around 10% of annual nominal UK GDP in 2011 – slightly higher than that in the United States, where the lendable value of collateral pledged by all depository institutions in the Discount Window (around $ in January 2012) is equivalent to around 8.5% of nominal US GDP in 2011. BIS central bankers’ speeches  5  building up their own holdings of high quality liquid assets to a more satisfactory level, that represents a very substantial “war chest” of potential liquidity in the event of significant adverse shocks. There is limited cost to the counterparty of pre-positioning, as collateral can be withdrawn on demand for use in other operations or market transactions.
During periods of stress there may be large shifts in the demand for reserves and so the Bank’s market operations need to be designed to meet both our monetary policy and financial stability objectives without conflict. In normal times, Bank Rate is set within a reserves averaging framework, in which commercial banks choose their own targets for reserves balances held at the Bank but are then required to meet those targets on average over the monthly maintenance period and are remunerated at Bank Rate. The Bank of England supplies just enough cash to the system so that banks can collectively meet their targets, and a combination of the Operational Standing Facilities and the inter-bank market should guide short-term market interest rates towards Bank Rate. This framework relies on the Bank ensuring the amount of sterling cash in the system is in line with that demanded, given Bank Rate. The liquidity swap structure of the DWF does not involve an extra injection of cash and so helps to avoid any direct impact on the setting of Bank Rate. The Bank may, however, decide in exceptional circumstances, to lend cash instead. That might be required if, for example, the gilt repo market was not functioning properly, or the size of the required draw is sufficiently large that the Bank deemed it unlikely that the counterparty will be able to repo the gilts without causing undue volatility in the markets.