Auctions of funds against wider collateral of the kind introduced by the Fed and the Bank of England side-step the stigma problem by having a number of banks borrow at the same time. They have definitely helped to underpin the system. But, compared with a facility, those auctions are available only periodically – fortnightly in the UK at present – rather than every day. The DWF is available on a continuous basis, and is designed to avoid the stigma problem. In particular, in its usual mode of operation, it involves a collateral swap, so there is no give away of its being used in the size of either the banking system’s reserves balances or our open market operations. And we publish data on its use on an aggregate, averaged basis and with a lag. This puts onto a permanent footing some of the technology of the Bank’s Special Liquidity Scheme, which was used in 2008 to provide 3-year financing, via a collateral swap, for assets that had become illiquid as a result of the crisis. 20 How the facilities can work in extremely stressed conditions Monthly, wide-collateral repos for a 3-month maturity and typically of fairly modest size, together with a continuously available Window for 30-day collateral swaps, are now permanent features of the Bank of England’s regime. Various parameters can be adapted in the face of extremely stressed conditions of the kind we have been facing. Thus, the widecollateral repos have been held fortnightly rather than monthly, and for very large sizes.
But people get used to this – or, in models, anticipate it – and so the extra inflation is simply built into their wage and price setting, without any benefit to output or jobs, but at the cost of a higher steady-state inflation rate. 11  This is discussed in Mervyn King’s 2007 letter to the Treasury Select Committee. 12  Page 205 of the 1999 paperback reprint of Bagehot (1873), “Lombard Street” in the Wiley Investment Classics series. 4  BIS Review 67/2009  assets and collateral. In doing so, the Bank recognises that its decisions will have a bearing on the development of markets. For example, for securitised assets, the Bank plans in due course to establish criteria for both the structure of the securitisations and the composition of the underlying portfolios that it will lend against. The Bank’s Discount Window Facility and wider-collateral OMOs: adverse incentives and the terms of liquidity insurance These expansions of the Bank of England’s facilities have required us to be much clearer than, perhaps, ever before about the terms on which we insure against liquidity risk. As with other types of insurance, without care central banks’ provision of insurance could inadvertently have the perverse effect of reducing banks’ incentives to contain their exposures to liquidity risk in the first place – no doubt bringing the banks temporarily higher profits, but increasing the potential costs to the wider economy of those liquidity risks crystallising.