•  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.
Central banks can also contribute to the function of money markets more broadly, by being willing to act early to address potential liquidity needs, and to support money market infrastructure more generally. I’ll end with a word on central banks’ “footprint.” Many of the developments raised in the paper and that will be discussed over the course of this conference have been a response to the needs of the day: having more reserves in the system is a reflection of the monetary policy stance required by economic developments; the leverage ratio has been developed as a part of the response to failure of the pre-crisis capital framework; and our intervention in risk-free benchmark rates is intended to avoid a co-ordination failure in which the most appropriate and robust benchmarks would not be adopted by the market. So while it is true to say that central banks’ footprint in money markets is larger now than in the days prior to the crisis, this has been out of necessity rather than design. As a tribe, central bankers retain a strong belief in financial markets’ ability to facilitate price discovery, allocate capital efficiently, and provide useful signals about the macro economy and financial stability. References Duffie, D and Krishnamurthy, A (2016), “Passthrough efficiency in the Fed’s New Monetary Policy Setting”, Preliminary version for presentation at the 2016 Jackson Hole Symposium. Fender, I and Lewrick, U (2015), “Calibrating the leverage ratio”, BIS Quarterly Review, December, pages 43–58.