As the member responsible for monetary policy preparations, I am in a position to influence discussions and decisions, apart from those at Board meetings, mainly as chairman of the internal monetary policy group that is made up of leading members of the Bank’s competent departments. Matters on the monetary policy agenda are discussed by this group on a continuous basis. In the light of that discussion, at Board meetings I also present proposals about the direction of policy. However, all the members of the group attend Board meetings and are able to present their own views. The arrangements we have chosen for internal discussions and preparations build on experiences at other central banks. A proposal for the approach we have used since autumn 1999 was drafted by some of us after talks with colleagues at the Bank of England, the Bundesbank and the Federal Reserve. There are some important differences, however. The officials who prepare the Board’s material are in a stronger position compared with other central banks. We ask them to produce a comprehensive assessment of inflation independently, whereas in the Bank of England, for instance, the counterpart to our Executive Board is involved in this work. And at neither the Bank of England nor the ECB are staff present at policy meetings. In other central banks, moreover, before the preparatory material is presented to the counterpart to our Executive Board, it has to be approved by the competent board member. So in all these respects our internal process is very open.
We care about the health and stability of the tri-party repo market both because of our interest in promoting stable and liquid financial markets and because we use it to implement monetary policy. The recent financial crisis showed us that the tri-party repo market was inherently unstable due to deficiencies in the settlement infrastructure. Prior to 2008, there was limited recognition of the ways in which adverse developments in this market could quickly transmit risk to other parts of the financial system with unforeseen consequences. We now know, with the benefit of hindsight, that the market was overly reliant on massive extensions of intraday credit by the clearing banks to the broker-dealers, that market participants did not adequately appreciate the magnitude of the risk embedded in the role played by the clearing banks, and, as a result, market participants underpriced risk in ways that undermined the market’s resiliency during periods of stress. These vulnerabilities were made apparent in the spring of 2008 when the events surrounding Bear Stearns demonstrated the run risk that existed more broadly in the tri-party repo market, prompting the Federal Reserve to intervene in order to restore confidence and market functioning. This intervention took the form of the creation of a Primary Dealer Credit Facility in March 2008, and a subsequent expansion of the facility in September 2008. The scope and scale of the market disruption were clearly very troublesome.