That is designed to underpin incentives for banks to manage liquidity risk prudently, in the long-run interests not only of the banking system but of the wider economy. We have published a schedule for DWF pricing with those properties, structured around four broad classes of collateral, grouped according to their liquidity/risk characteristics. 17 We plan, after consultation, to introduce an auction structure for the wider-collateral long-term repo OMOs that delivers the same broad result of counterparties having to pay up to borrow against less liquid collateral. 18  16  The Bank published its general approach to collateral valuations when it disclosed use of the Special Liquidity Scheme. It stated: “Securities are valued by the Bank using observed market prices that are independent and routinely available publicly. The Bank reserves the right to use its own calculated prices, including where such independent market prices are unavailable. Those calculated prices are designed to deliver valuations taking account of securities’ contracted cash flows and yields of comparable securities, but not individual loan-byloan analysis of portfolios. To account for the risk that a calculated price is an over-estimate of what a market price would have been had it existed, an additional haircut is added. The Bank’s valuation of all securities is binding.” For more details, see the Market Notice for the Special Liquidity Scheme released on 21 April 2008. www.bankofengland.co.uk/markets/sls/index.htm.
In other words, a central bank policy of lending against only the best assets is likely to prove time inconsistent when it comes to the crunch. This is not an ivory tower problem. It is a real problem. It is why the Bank of England confirmed last year that we do stand ready, via our public facilities, to lend against a wide range of collateral, subject crucially to appropriate haircuts and other terms. To do otherwise would be futile; it would lack credibility. And to do so is consistent with Bagehot’s dictum that central banks should lend against “everything which in common times is good ‘banking security’ ”. 12 The Bank has already published an initial list of collateral eligible in its dedicated liquidityinsurance facilities. Looking ahead, the Bank plans to expand the list, and to promulgate detailed eligibility criteria reflecting its risk tolerance and experience gained from managing  England’s Market Operations: A consultative paper by the Bank of England”, October 2008. Mark Carney, Governor of the Bank of Canada, has also set out his principles for the Bank of Canada’s liquidity provision. 10  Broadly, if the monetary authority thinks it can achieve above “trend” output growth or employment for a while by reducing interest rates, it may be tempted to let inflation temporarily rise above the rate it has promised to deliver.