Given the Federal Reserve’s experience in the agency MBS market over the past eight years, it is important to consider what role—if any— agency MBS transactions may have in the policy implementation toolkit of the future. 1 SOMApurchased agency debt from 1971 to 1981, so participating in one of the agency markets was not entirely  new in 2008. In addition, in 2011–12 a maturity extension program extended the maturity of Treasury securities in the SOMA portfolio, although it did not expand the size of the SOMA portfolio. 2 The share is calculated as of October 12, 2016, see System Open Market Account Holdings. 3 Since the start of the year, these purchases have averaged approximately $ billion per month. In addition to 7 / 10  BIS central bankers' speeches  conducting these transactions, the Desk reinvests maturing proceeds from Treasury securities, though the Treasury reinvestment transactions take place at auction rather than in the primary market. 4 The accommodative monetary policy stance of the European Central Bank (ECB) rests upon three nonstandard  instruments: a series of targeted long-term refinancing operations, a negative deposit facility rate, and an asset purchase program that includes private and public sector securities. The Bank of England (BoE) currently sets the Bank Rate at 25 basis points and is currently purchasing £ billion in gilts over a 6-month period; the Asset Purchase Facility will have £ billion in gilts when the purchase round ends in February 2017.
However, in some sense the Basel proposals will have failed in their purpose unless the pricing of bank credit better reflects the riskiness of borrowers. By removing perverse incentives for banks, we also wish to establish better incentives for borrowers. Greater risk sensitivity does, however, carry with it a possible danger, and that is the introduction of potential 'procyclicality' into the capital framework. I have touched on this concern more than once in the past, and make no apology for doing so again. To counteract this danger, regulators should not allow banks' internal ratings to reflect the optimistic prospects of borrowers during an economic upswing: rather, ratings need to be genuinely forward-looking, and to factor in borrowers' likely performance during economic stress. Long runs of performance records will be invaluable in establishing how robust borrowers are to different economic circumstances. In this way, economic downturns when they come should not prove too much of a shock to the ratings scales. Of course, I do not wish to sound complacent regarding the avoidance of 'procyclicality'. Capital is after all meant to be a cushion against volatility, also referred to as 'unexpected' loss, but measuring the unexpected is something of an oxymoron. Some of our researchers at the Bank of England recently reviewed the usefulness of various predictive models of banking problems, but unfortunately our conclusion at the moment is that banking crises are each unique in its own way.