But the implications of that shift were greatly amplified by a breakdown in the functioning of markets core to the maintenance of monetary and financial stability. Many of those longstanding vulnerabilities I mentioned a moment ago were in play. Liquidity imbalances between asset maturities and redemptions in money market and other open-ended funds exacerbated moves in asset prices. Gaps in liquidity planning meant some firms had to scramble to meet margin calls. And sharp disruptions in government and corporate bond markets raised questions about the role of leveraged investors, and the willingness and capacity of dealers to intermediate at times of stress. To avoid an even deeper economic collapse, the functioning of these markets had to be restored rapidly. And that was achieved through swift and decisive central bank action, using large-scale asset purchases and other tools capable of tackling both the economic shock and the market dysfunction. Since March of last year, G10 central bank balance sheets have risen by over $ trillion. This was an appropriate response to a truly unprecedented situation – just as powerful anti-inflammatory medicines are the right solution to a sudden and massive flare up. But such drugs are less well suited to treating long-term conditions – and there is every reason to believe that, absent further action, we will see more frequent periods of dysfunction in the very markets increasingly relied on by households and firms, if business model vulnerabilities persist and intermediation capacity remains strained.
Clarity will be required as to whether, and if so how, such activities fall within their formal remits. In some cases they may be able to use existing tools designed for monetary policy purposes, as they did in the Covid crisis. But in others, those tools may prove poorly suited to the task, and new ways will be needed to achieve those ends, whether through outright purchase and sale operations, repo facilities or other means. 11  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  11  Second, central banks will need to decide which marketable assets should be in scope of any new tools. The most obvious candidate is government bonds, which lay at the epicentre of the dash for cash. For other, riskier, assets to qualify, a case would need to be made both that they are sufficiently core to monetary and financial stability, and that central banks can price and risk manage them effectively. It is notable that many central banks bought a range of assets beyond government bonds during the 2008-9 and Covid crises, including corporate bonds and commercial paper. Third, central banks will need to reflect on whether the use of their balance sheets to address market dysfunction should remain primarily discretionary, or whether at least aspects of that role should be formalised into standing facilities, the terms of which are known in advance.