Moreover, to the extent that the support offered by asset purchases represents the offer of the central bank’s balance sheet as an alternative venue for intermediation when private markets have seized up, it is natural that the asset purchases could be accompanied by asset sales, either in parallel or at least in close proximity. It is by both buying and selling (or alternatively lending and borrowing) that the central bank intermediate financial transactions between private market participants. This is the essence of the central bank acting as a central counterparty or market maker of last resort. Bank of England  Page 11  Relationship with financial stability There is also a natural complementarity between providing central bank support to maintain market functioning and contributing to the maintenance of financial stability. Indeed, the two go hand‐in‐hand. The direction of support will depend upon the specific incidence of market failure causing market dysfunction, the structure of the financial system, and the broader flexibility of the economy. This is the essence of why such interventions will be ‘targeted’ on specific market segments. These factors will vary both over time and from one jurisdiction to another. The form of support offered by central banks will thus also vary. Yet central banks must also recognize the limitations of their policy. In the face of crisis, they may need to be innovative in their approach. But central banks should be very wary of assuming responsibility for goals that they do not have the instruments to pursue.
In common with other central banks, the Bank of England has a number of tools designed to provide backstop liquidity to banks under a range of scenarios. But in recent years, financial intermediation via non-bank financial institutions (NBFIs) – what we used to call ‘shadow banks’ – has increased, in part because of greater regulation of the core banking system following the global financial crisis. Of course, the main responsibility for managing the liquidity and other exposures of these institutions lies with the institutions themselves, within an appropriate regulatory and supervisory structure.19 But as we have learnt somewhat painfully over recent decades in a variety of jurisdictions, occasions can arise where the systemic nature of liquidity risks make it difficult, if not impossible, for individual institutions to attain the resilience and robustness they need. Central banks have therefore begun to discuss the need for additional backstops. In particular, they have considered whether the need for asset purchases to address dysfunction in the markets where NBFIs operate has risen relative to the need to provide liquidity to standard banking counterparts for central banks. Since asset purchases implemented in this context work in concert with changes in Bank Rate, they naturally take place when those interest rate changes are taking place.20 In other words, such asset purchases would naturally happen when Bank Rate is away from its effective lower bound, and retains the flexibility to move in both directions.