And the DWF currently offers a 12-month swap option, as well as the standard 30-day facility. In summary, by providing liquidity insurance the Bank aims effectively to give essentially sound banks and others time to address the problems created by stress, and for the authorities to develop remedial plans, without creating perverse incentives or exposing itself to risk. Given those aims, banks must avail themselves of these facilities. We believe, for example, that all qualifying banks and building societies should sign up for the Discount Window Facility; that they should pre-position with us a range of eligible collateral, so that they avoid operational stumbles when they seek to use the Window; that they should use it regularly in meaningful size as part of testing and making a reality of their contingency plans; and that they should share those plans with the Bank, which, amongst other things, would help us assess applications to draw. In that way, the DWF can truly help to underpin the system’s liquidity in the future. 19  See Tucker PMWT (2008), “The Structure of Regulation: Lessons from the Crisis of 2007”, a speech to the LSE’s Financial Markets Group Conference; and the Committee on the Global Financial System, Paper No. 31 (July 2008), “Central bank operations in response to the financial turmoil”, CGFS Papers, Bank for International Settlements. 20  The SLS was introduced in April 2008 and was open until end-January 2009.
A private scheme of that kind would not work, however, if the insurer could not afford to subscribe when the call came; or if investment institutions were unwilling to enter into such commitments on a sufficient scale for the insurance to make a difference to the system’s resilience. Another idea circulating currently 30 is that banks would be required by the authorities to issue hybrid-debt-capital instruments that could be converted when needed into loss-absorbing equity. In one variant, the option to require conversion would lie in the hands of regulators provided a systemic-severity test were passed. Summary and conclusions During the current crisis, the normal functioning of the financial system broke down, with profound effects on credit conditions and on the appropriate monetary policy response. Although I have ranged widely today, I have in fact deliberately not covered the operations employed in some countries to lend directly to firms, effectively by-passing the financial system; or the actions by some central banks, including the Bank of England, to expand the money supply in an environment of near-zero policy rates. Instead, I have focused on the repertoire of instruments directed to supporting, and ideally reviving, the financial system itself: funding liquidity, market liquidity, and solvency.