This is by any standards a large portfolio – amounting to about a third of the total stock of conventional gilts in issue, with an average duration of 12 years, it has a so-called ‘PV01’ – or valuation 7  sensitivity to a one basis point movement in average interest rates – of about £ . Now an open position of this size would be many times larger than even the most aggressive traders in this room would dream about running themselves. Your natural instinct as a risk professional if you came across this in the private sector would probably be to seek an immediate reduction in the position, or a hedge in the market. But any attempt to do this would undermine the very policy objective of the Monetary Policy Committee in pursuit of their 2% inflation target: ie to induce a portfolio shift into riskier assets by removing duration from the market. As I noted earlier, this is a classic example of the central bank policymaker as fireman. What then is the role for the central bank financial risk function? For the new second line, it is a classical watching brief. Its first duty would have been to ensure there were sufficient resources to back the risk. In this case, that was achieved some years ago by placing the portfolio in a separate subsidiary of the Bank  7  For more details on the current composition of the APF gilt portfolio and the operations, see http://www.bankofengland.co.uk/markets/Pages/apf/gilts/results.aspx.
20 Bank of England (a)  15  15  10  10  5  5  5  0  0 1830  0  1860  1890  1920  1950  1980  2010  Sources: Bank of England, Federal Reserve, U.S. Bureau of Labour Statistics, ONS and Samuel H. Williamson (2017), 'What Was the U.S. GDP Then?'. (a) Data as at February. Final data point shows the latest published balance sheet data, at 29 February 2016, plus the increase in the loan to the Asset Purchase Facility since this time. Excludes TARGET balances held at the Bank by European central banks in 1999-2001. (b) Consolidated assets of all Federal Reserve banks. Data as at end December. Three key developments disturbed that calm, and led to the introduction of our new financial risk framework. The first was the huge increase in the size of the Bank’s balance sheet following the start of the financial crisis. Today the Bank of England holds assets worth about a quarter of UK annual GDP: a five-fold increase on a decade earlier (Chart 2). In the early part of the financial crisis, much of that increase reflected large scale liquidity assistance to the banking sector. For example the Bank lent £ to RBS 3  4  and HBOS in 2008-9 , and its market-wide Special Liquidity Scheme peaked at £ in 2009 .