The main behavioural assumption underlying this monetary injection was that it would gain traction via a portfolio rebalancing channel. Most UK government bonds are held by non-bank financial sector companies (OFCs), such as pension funds and insurance companies. 3 As long as these investors do not regard money as a perfect substitute for gilts, they will attempt to reduce the additional money holdings associated with gilt purchases by switching into other assets. This process of portfolio rebalancing will continue until the yields on gilts and on alternative assets, such as corporate bonds and equities, have fallen sufficiently to compensate investors for holding the higher level of money balances. The degree of stimulus associated with the monetary  2  Del Negro, Eggertsson, Ferrero and Kiyotaki (2009) extend this framework to analyse monetary policy at zero bound. 3  At the end of 2008, prior to the commencement of the asset purchase programme, almost 60% of outstanding gilts were held by OFCs (of which 40% were held by insurance companies and pension funds), and 35% were held by overseas investors. UK banks and building societies held only 4% of gilts. BIS Review 29/2010  3  injection will be greater the lower the substitutability between money and gilts, and the higher the substitutability between gilts and other assets. Trying to estimate the likely size of these effects is very difficult, not least because a policy of this form and scale has never been implemented in the UK.
Instead, I’d like to focus on some of the more awkward questions which confront us as a regulator with prudential and competition objectives. Five years on from the introduction of our competition objective it’s a natural moment to do this. But before turning to those questions, I have to ask you to indulge me for a few moments in picking out what to me are the most significant things we have done to advance our secondary competition objective during the first five years of its existence. I will limit myself to three:   First, the structures we have put in place to encourage the entry of new banks: our New Banks Unit, which engages with prospective new entrants and provides a nursery for newly authorised banks; our ‘mobilisation phase’ which allows new banks to get going in a live environment but before being released into the wild; and our ‘wind-down’ approach to setting PRA buffer requirements for new banks in order to avoid penalising early stage growth. I don’t think it’s a coincidence that we’ve authorised 17 new UK banks in such a short period.1    Second, bank capital. I have long been troubled by the difference between some standardised and modelled capital requirements, particularly for mortgages. And there are remaining tensions on capital which I will come back to.