As with an independent central bank that houses supervision and liquidity provision under one roof, there are advantages to combining country surveillance and lending in one global institution, with an impartial and experienced staff. And risks are most efficiently pooled at a global level. This is the raison d’etre for the IMF. 8  4  Bank of England staff estimates based on the spread between returns on reserve assets and those paid on domestic bonds. BIS central bankers’ speeches  Unfortunately, signs of fragmentation of the global financial safety net are obviously in part a reaction to the failure to implement the 2010 quota and governance reforms to bolster the IMF’s resources and the representation of emerging market economies. The priority must be to implement those. But we also need to consider whether and how the temporary resources collected by the IMF in the form of bilateral loans when it passed the hat around in 2012 could be put on a more permanent footing. One possibility is to extend these bilateral loans further. Another possibility is for the IMF to borrow directly from capital markets 9 during a systemic crisis which would create safe assets when demand for them is high, allowing funds to be recycled to those parts of the world with temporary liquidity needs. A more reliable and flexible resource base would allow the IMF to more credibly perform a crisis prevention role of providing committed lines of credit to sound sovereigns through its Flexible and Precautionary Liquidity lines.
It would be foolish to declare categorically that the Bank of England has eliminated stigma or moral hazard. But we can say that these regulatory reforms have made it easier for the Bank of England to provide liquidity insurance to solvent institutions. In turn, this has allowed us to increase the availability and flexibility of our liquidity facilities and to give more clarity around the circumstances under which that insurance would be provided. These changes should help to reduce the stigma attached to the use of central bank liquidity facilities, and encourage earlier take-up to limit contagion and protect financial stability during future crises. 4  See Hume (1758). 5  See Carney (2013) and Shafik (2015). 6  See Hauser (2014) and Tucker (2014). 2  BIS central bankers’ speeches  3. Are sovereigns like banks? Attention more recently has turned to sovereign rather than banking vulnerabilities and two issues in particular have brought this into sharper focus. First, do fundamentally sound emerging market economies have access to the right form of liquidity insurance to deal with the challenges posed by lower growth, falling commodity prices and potential spillovers from the possible exit of exceptional monetary policy in advanced economies? And second, how can we manage the tension between the need to recognise when one sovereign’s debt has become unsustainable and the need to avoid contagion across countries in times of stress? There are many ways in which sovereigns are like banks in terms of the liquidity risks they face.