But such lending is well-collateralised, so low risk, and is always intended to be temporary: to overcome a one-off shock or to bridge to a more lasting solution. To discourage reliance on these operations, standard practice is to charge a penalty rate relative to market prices. These liquidity insurance operations are an integral part of the Sterling Monetary Framework which delivers our monetary policy objectives (See Fisher, 2009 for further details). The Bank of England does not have access to funds that could be used to sustain commercial lending operations. We do not have the power to raise tax, nor do we have significant retail deposits, nor the freedom to borrow in large scale in the wholesale markets for non-monetary purposes. 3 More generally, in a capitalist economy, it is private sector or, in some cases, national savings which ultimately fund the banking system. And it is the job of financial intermediaries to translate those savings efficiently into private sector spending. In contrast, the fiscal authorities (including national wealth funds where they exist) can access private sector funding via taxation or by borrowing in large scale. There are many instances throughout UK economic history where the government has intervened to support private markets, or indeed individual firms. There are well-known risks associated with such action, including the loss of public money and/or an inefficient allocation of capital in the economy. There are also substantial and well-known potential benefits if the intervention corrects a market failure or achieves a wider social objective.
Had the APF done so, in addition to strong primary market private sector demand, it would undoubtedly have helped to drive down market spreads. But it would also have risked displacing that private sector demand, to little purpose in my view. In fact, a greater intervention in this market during this period could have made things worse – the problem was in the functioning of the market, not a lack of demand for the assets. It would be fair to say that the corporate bond scheme attracted some criticism in its early months. Many observers misunderstood the nature and purpose of the scheme and considered that the small amounts bought were a sign of failure. But, as I have stressed tonight, the objectives of the scheme were not based on buying a particular amount. In fact, over the past year, the corporate bond market overall has performed consistently strongly and in line with the original objectives of the scheme: There has been record issuance of sterling corporate bonds (Chart 5); spreads for eligible bonds have halved (Chart 6); bid-offer spreads have narrowed; and the bond-CDS basis 6 has also contracted significantly. These asset purchases do seem to have played their part in improving the access of investment grade corporates to bond market financing. The one disappointing feature of the sterling corporate bond market is the continuing problem of secondary market illiquidity.