In addition, as part of the Bank’s desire to ensure that commercial banks are adequately incentivised to seek their own liquidity insurance, the cost of borrowing increases with the size of the draw. The resulting matrix of fees is summarised in Table 1. Table 1 Fee table for DWF drawings of gilts Fees (bps) % of sterling eligible liabilities  0-10%  Collateral Type Level A  Level B  Level C  Level D  (e.g. high quality  (e.g. liquid and  (e.g. illiquid  (e.g. own-name  sovereign debt)  high quality  transferable  securitisations  mortgage and  securitised loans  and covered  corporate bonds)  and mortgages)  bonds, and loans)  50  75  125  200  75  125  200  300  100  175  275  400  10-20% 20-30% >30%  At the Bank’s discretion  There is one further important point to make regarding the policy decisions underpinning the design of the DWF. It relates to the challenges associated with providing liquidity support while not compromising the Bank of England’s ability to conduct monetary policy. To implement interest rate decisions, the Bank must, through its market operations, adjust the supply of central bank money in response to changes in the demand for banknotes and reserves, given the MPC’s policy rate (Bank Rate).
Portfolios of loans can be easier for the Bank to assess from a risk perspective, as they do not embed the complex structures sometimes present in securitised assets. And securitising loans into asset backed securities – such as RMBS – is both complex and expensive for the firms, and generally only available to those large enough to have an existing securitisation programme. The ability to accept raw loan collateral means that smaller counterparties, without securitisation platforms, are not disadvantaged when positioning collateral at the DWF. Since financial instability can start with smaller banks just as easily as larger ones, expanding the universe of possible Discount Window counterparties could lead to significant financial stability benefits. Alongside the expansion of eligible collateral to loan portfolios, we have been encouraging banks to “pre-position” their collateral. Pre-positioning involves the commercial banks identifying, and the Bank of England assessing, various types of collateral ex ante, so that it need not be assessed at short notice in the event of a sudden and unexpected need to borrow at the Discount Window. Assessing varied pools of illiquid collateral can be extremely complex and time consuming. The Bank may not be able to lend much, if at all, against collateral where it has not had time to conduct sufficient due diligence. As a result, it is vital that such collateral is pre-positioned well ahead of any need to draw. One of the benefits from having a more public and transparent facility is that such due diligence is much easier to carry out.