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Central Bank Liquidity Management
Techniques in crisis times
Bank of England (BOE)
2007-2010
Yonca Kumsar
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Topics to cover :
1.Monetary Policy of BOE
– Interest Rate
– Quantitative Easing
2.Reserve Requirements
3.Operational Standing Facilities
4.Balance Sheets of BOE
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1.Monetary Policy Operations
• Monetary Policy Committee decides on Bank Rate
• In March 2009 MPC announced it starts to inject
money directly into the economy by purchasing assets,
known as Quantitative Easing
– Why ? In recession you cant lower interest rates below
zero, then quantitative easing is used to support demand.
– BOE reduced Bank Rate by %0.5 to %0.5 and announced
£75 Billion Asset Purchase Programme
(5 March 2009)
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Interest Rates
• Bank Rate: interest rate which bank lends to
financial institutions
• SONIA: Sterling Overnight Interbank Average rate
• The Bank seeks to meet the inflation target(%2)
by setting Bank rate.
• In crisis: Bank rate is lowered to prevent
contraction in the economy.
• BOE reduced bank rate by 0.5 to %0.5. (March
2009)
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Quantitative Easing
• In Jan2009, Asset Purchase Facility (APF) is
authorised to buy high-quality assets
• Purchase of assets are financed by the Bank
creating money
• In 5 March, MPC is authorised to use the APF
for monetary policy purpose
• In crisis: BOE announced £75 Billion Asset
Purchase Programe
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UK policy rates and o/n rate (SONIA)
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2.Reserve Requirements
• voluntary reserve ratio system, with no minimum
reserve requirement
• reserves averaged over a monthly maintenance period
during which they are remunerated at Bank Rate
• How can we explain these changes in average cash
reserve ratio across the entire United Kingdom banking
system ?
*
Country
1968
1978
1988
1998
2010
United
Kingdom
20.5
15.9
5.0
3.1
43.1
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• Answer:
• In 2010 it was very high, with a 43.1% average
this reflects the impact of Quantitative Easing .
• From 1968 to 1998 it has been declining for
many years
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3.Operational Standing Facilities
• Aim : to prevent money market rates moving
away from Bank rate
• Corridor is symmetric with the deposit rate of
25bps below Bank Rate and the lending rate
25bps above Bank Rate.
• Banks are encouraged to transfer colleteral
into the Bank
• They have weekly intermeetings.
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Symmetric Corridor Approach
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In crisis times:
• But , In March 2009 : deposit rate was set to
zero and lending rate to 25bps above Bank
rate.
• Also , they enlarged their colleteral demand to
be more productive.
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4.Balance Sheets of BOE
Why do Balance sheet
percentages of
annual nominal GDP
increase after crisis
times ?
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Balance Sheet as % of GDP
It reflects an expansion of
both the Bank’s liquidity
insurance operations,
and more recently the
addition of asset
purchases as an operating
objective of the Monetary
Policy Committee.
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Assets :
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Liabilities:
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In Crisis:
• Dollar reverse repo operations increased ,
because Federal Reserve Bank of New York
provided $ after Lehman Bankruptcy and in
return BOE lended sterling
• In case of long term need of liquidity long
term reverse repos increased.
• Loan to asset purchase facility : Quantitative
easing
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Leanness Indicator :
• When AF- BN is zero , when Balance Sheet
only displays MPI , than BS is lean
• Indicator :1-(AF in assets+AF in liab –BN) /( 2*
BS Length)
• In crisis: BN remained almost same but since
AF as FX and assets increased, leanness
decreased.
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BS pre and after crisis
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Thank you!
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