BIS Review 126/2009  5  Chart 1 – The Bank of England’s balance sheet  Liabilities £ billions  Other liabilities Short-term open market operations, drain  300 Lehm an  APF Phase II  Reserve Balances Foreign currency public securities issued  250  Cash ratio deposits Notes in circulation  200  150  100  Assets  50  £ billions 0 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Mar-09 Jun-09 Sep-09 LehmDec-08 an APF Phase II Other assets 300 Loan to APF Longer-term sterling reverse repo  250  Short-term open market operations, lending Ways and Means advances to HM Government  200  Bonds and other securities acquired via market transactions 150  100  50  0 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09  6  BIS Review 126/2009  Chart 2 – Gilt yields  Feb IR Pub.
The Asset Purchase Facility also pays interest at Bank Rate to the Bank of England on the loan used to buy the assets. At present, the average coupon on the purchased gilts is around 5%, which substantially exceeds Bank Rate at 0.5%. Consequently the net interest income of the Fund is positive. But international accounting principles dictate that the assets on the balance sheet of the Asset Purchase Facility are also marked to market. Since gilt prices are highly sensitive to movements in discount rates, it is quite plausible that falls in the prices of gilts as a result of any future increase in discount rates will leave the Asset Purchase Facility accounts in deficit overall. The question is: Does this matter? At first sight, any loss on the Asset Purchase Facility would represent a cost to the taxpayer, given the Treasury indemnity. But of course the gilts held in one part of the public sector, the Asset Purchase Facility, are just a liability of the rest of the public sector. In the accounts for the rest of the public sector, there must therefore be  2  The ECB has undertaken no such purchases of government debt, while the Federal Reserve’s purchases of US Treasuries represent a much smaller fraction of the market. BIS Review 126/2009  3  offsetting interest flows, as well as corresponding capital gains or losses, at least if those accounts were also to be marked to market.