It also sits at the base of a particularly steep waterfall: since any loss in a lending operation would be expected to be met, first by a solvent firm’s own resources, second by the central bank’s collateral haircuts, and only then by its capital. Any loss beyond that implicitly falls to the government, as the ultimate owner of the central bank (Chart 6). Chart 6: The central bank capital waterfall  banking system  Central bank balance sheet  General Government  Probability  Self-insurance  Haircuts Capital  Risk-sharing with the Treasury More severe losses  Central banks across the globe differ in how they divide up this pie. In the UK, the Bank of England operates with a relatively low level of capital, and has few means of rapidly replenishing that capital if it is depleted (Chart 7). As a result it has tended to rely heavily on UK government indemnities for its larger operations, such as the quantitative easing example I gave a few moments ago. The Bank’s measured leverage ratio is 11  All speeches are available online at www.bankofengland.co.uk/speeches  11  just 1%, reflecting the fact that it supports a balance sheet of around £ on less than £ of equity. 12  But the ratio for its non-indemnified balance is materially higher, reflecting the significant role played by indemnities.
However, this central scenario is not free from risks. The international environment has not only deteriorated recently, but it has also become more vulnerable due to the extent of the slowdown of the global economy -in particular, of some emerging economies, as far as they may affect world growth and international tradeand the evolution of commodity prices, in a context where there are doubts about the reaction of markets to the normalization of US monetary policy. On the Spanish domestic political front, it is obvious that the uncertainty regarding the formation of a new government may affect investment and consumption decisions. So far, the impact on the Spanish financial markets has been limited. In any case, I take it for granted that any new government will show respect towards European Union commitments and the general framework of the European Union fiscal governance. Thank you very much for your attention. BIS central bankers’ speeches  5