A central bank will also be keen to avoid the moral hazard involved in encouraging a commercial firm to undertake particular types of risk-taking activity. There are certain principles that a central bank should therefore observe: (1)  It should not lend to any bank whose prospective solvency is seriously in question. (2)  It should always take sufficient, good-quality collateral against its lending. (3)  Central bank operations should be designed to deliver public policy objectives, not to support the profitability of any particular commercial firm. 1  See the “The Framework for the Bank of England’s operations in the Sterling Money Markets (the ‘Red Book’)” at http://www.bankofengland.co.uk/markets/sterlingoperations/redbook.htm  2  See Fisher (2010), “Managing Liquidity in the System: the Bank’s Liquidity Insurance Facilities” at http://www.bankofengland.co.uk/publications/speeches/2010/speech450.pdf  BIS central bankers’ speeches  1  Bank of England consolidated balance sheet (a) Chart 1: Liabilities  Chart 2: Assets £ billions  £ billions  300  300 Notes in Circulation  Long-term repos 250  250  Short-term repos  Reserve balances Other liabilities  200  200  Loan to APF 150  150  Other assets  100  100  50  50 0  0 2006  2007  2008  2009  2010  2011  2006  2007  2008  2009  2010  2011  (a) Data to 16 March 2011  That may sound like a simple set of rules, but there are deep policy issues to consider when it comes to implementation.
And absent significant intervention from authorities here and in other countries, would have risked tightening financing conditions significantly and made the impact of the pandemic much worse. Tackling the causes of that is today a major area of work both internationally and domestically. For banks, we tested rigorously to ensure safety and soundness, and particularly that banks could support the economy through these very hard times. Indeed, we tested to make sure this support could continue through even harder times, and the answer was positive. This matters greatly because having a resilient system has meant that business lending could be sustained, and mortgage servicing pauses to support households seriously affected by Covid and its economic effects were extensively available and used, all to assist with dealing with the consequences of Covid. It has been the first major test of the post-financial crisis reforms to regulatory standards. In my assessment this outcome mainly passes the test of resilience, accepting both that we have work to do on the lessons from the dash for cash, and that we can never stand still because the positive benefits of innovation also create their own challenges. But, what is meant by the idea of resilience? A resilient financial system has the resources and flexibility to respond to a range of shocks of different sorts. In doing so, it will support stronger growth over the long-run, helping the economy to bounce back and reducing long-term economic scarring caused by the shock.