302 Quarterly Bulletin 2009 Q4 Bank of England speeches A short summary of speeches made by Bank personnel since historically the worst financial crises have come when asset publication of the previous Bulletin are listed below. price busts have led to banking system failures. However, there remains room for tools that could directly address costly 2009: a review of the economic year asset price booms. In presenting evidence that residential real Spencer Dale, Executive Director and Chief Economist, estate bubbles tend to have higher real economic costs than December 2009. equity booms, Dr Posen suggested that the use of countercyclical real estate taxes could provide the simple blunt www.bankofengland.co.uk/publications/speeches/2009/ instrument required to successfully lean against the wind in speech416.pdf real estate prices. The bottom line for monetary policy coming out of the crisis is, if you have a financial problem, use financial In this speech, Spencer Dale noted that much of the world policy tools to fix it. started 2009 in economic freefall. This was driven by tight credit conditions, amplified by a collapse in confidence. It The UK bank resolution regime fell to policy to break the ensuing vicious cycle. In the Andrew Bailey, Executive Director for Banking Services and United Kingdom, the MPC cut Bank Rate to 0.5% and Chief Cashier, November 2009. commenced a programme of asset purchases. This easing occurred alongside a range of Government policies. There www.bankofengland.co.uk/publications/speeches/2009/ were encouraging signs that these policies were working; speech414.pdf corporate insolvencies and unemployment had both increased by less than might have been feared. Turning to the prospects In this speech, Andrew Bailey described the new special for 2010: a period of renewed expansion was likely, but this resolution regime (SRR), created under the 2009 Banking Act. should not obscure the fact that structural adjustments Having set out the case for an SRR, he described the objectives needed to occur in the economy. Explaining his vote to of the UK regime, the tools available, the roles of the different maintain the level of asset purchases at £175 billion in authorities and the safeguards that exist to protect property November, he fully recognised the benefits of a more rights. expansionary policy given the downside risks to the economy. However he was also wary of the potential risks to such a Bailey went on to highlight several areas where further work policy. was required to hone the regime. The Financial Services Compensation Scheme should gradually be pre-funded by Finding the right tool for dealing with asset price booms industry contributions. On safeguards, the right balance Adam Posen, Monetary Policy Committee member, should be struck between discretion and ensuring banks and December 2009. markets knew as much as they could about how the Bank would, and would not, act in a resolution. Noting that www.bankofengland.co.uk/publications/speeches/2009/ resolution is an invasive form of surgery requiring large speech415.pdf amounts of information, he welcomed work on recovery and resolution plans. Finally he noted the importance of ensuring In this speech, Dr Adam Posen discussed how costly asset price the regime could deal with cross-border resolutions. booms may be tackled in the future. He rejected the notion that monetary policy can be used to successfully ‘lean against The Bank of England’s balance sheet: monetary policy and the wind’ and tackle asset prices directly as he presented liquidity provision during the financial crisis evidence that suggested there was no dependable relationship Paul Fisher, Executive Director for Markets, November 2009. between interest rates, or narrow money, and asset prices. There is also little evidence that tightening of conditions could www.bankofengland.co.uk/publications/speeches/2009/ limit or counteract the boom once under way. In fact, speech413.pdf tightening conditions in the face of an asset price boom could make matters worse for open economies through the The extent of the Bank of England’s support for the economy attraction of capital inflows. Dr Posen highlighted that there during the past two years has been historically exceptional. In are other tools that are better suited to dealing with asset this speech, Paul Fisher used the Bank’s balance sheet as a price booms. Macroprudential instruments, such as those framework to describe the expanded set of operations which proposed in a recent Bank of England (2009) discussion paper have been undertaken during the financial crisis. There has would be a welcome addition to the toolkit, given that been an unprecedented pace of innovation. New tools and Quarterly Bulletin Speeches 303 facilities, such as the Asset Purchase Facility have been created the 1990s’ experience in the United Kingdom when a to implement monetary policy. Other operations, such as the successful rebalancing was achieved. He then went on to Special Liquidity Scheme, have been focused toward providing discuss the policy choices that will need to be made as the liquidity support to the banking system. The Discount Window recovery develops to ensure the economy is steered through Facility has been one of the most significant, permanent an upswing underpinned by low inflation. developments in this framework. He noted that at some point the Bank’s balance sheet may return to something like its The crisis management menu former composition, and perhaps even its former size, but the Paul Tucker, Deputy Governor, November 2009. innovations introduced during the crisis should leave the Bank better prepared to deal with stresses in the future. www.bankofengland.co.uk/publications/speeches/2009/ speech410.pdf Recovery and resolution plans Andrew Bailey, Executive Director for Banking Services and In this speech, Paul Tucker reviewed the various components of Chief Cashier, November 2009. a crisis management package for financial institutions. These are central bank liquidity insurance for viable firms and www.bankofengland.co.uk/publications/speeches/2009/ markets; recovery and resolution plans, or ‘living wills’ for speech412.pdf firms; and official sector support operations, including capital of last resort. During the crisis governments have gone In remarks at the Santander International Banking Conference, beyond insuring retail deposits via established schemes, to Andrew Bailey discussed the role of recovery and resolution guarantee uninsured wholesale creditors too. Principles need plans (RRPs) as part of the response to the banking crisis. to be developed to ensure that the cost falls to firms, their wholesale creditors and equity holders, rather than the general He noted that RRPs should be critical tools for financial taxpayer. institutions themselves (where they should be owned at Board level), banking supervisors and resolution authorities. Bailey Banking on the state stressed that the Bank, in its role as resolution authority, Andrew Haldane, Executive Director for Financial Stability, would place great emphasis on the existence of credible and November 2009. usable resolution plans. He noted that while these must be owned and produced by the authorities, firms would need to www.bankofengland.co.uk/publications/speeches/2009/ play a vital role in producing and maintaining the information speech409.pdf needed to enable a resolution plan to be enacted. Bailey went on to use the examples of Northern Rock and Lehman Brothers This paper discusses the evolution in the risks to banks’ to illustrate the role that RRPs might play as a device to enable balance sheets and the impact on the evolution of the three tough questioning on structures and business models. elements of the banking safety net — liquidity insurance, deposit insurance and capital insurance. Evidence shows a Prospects for the British economy after the financial storm progressive rise in banking risk that has been accompanied by a Andrew Sentance, Monetary Policy Committee member, widening and deepening of the safety net. The paper then November 2009. goes on to explain the sources of this time-consistency problem and approaches to tackling it, including introducing www.bankofengland.co.uk/publications/speeches/2009/ leverage limits, reconsidering the industrial organisation of speech411.pdf banking and redesigning the safety net. In this speech, Andrew Sentance discussed the prospects for Getting credit flowing: a non-monetarist approach to Britain’s economic recovery in the wake of the financial storm. quantitative easing He talked about the positive prospects for UK growth in the Adam Posen, Monetary Policy Committee member, short term, including signs of growth across the global October 2009. economy; positive news from business surveys; improvements in consumer spending and confidence; and an www.bankofengland.co.uk/publications/speeches/2009/ apparent levelling off in unemployment. But he cautioned speech408.pdf that there are a number of uncertainties that stand to affect how the recovery develops. The pace of the global recovery In this speech, Dr Adam Posen argued that unconventional and the need for domestic rebalancing between the public and monetary policy should be thought about in terms of its private sector are two particular areas for concern. The legacy impact on specific credit markets as well as in its general of the financial crisis would also create headwinds. But he impact on portfolios. The goal of central bank measures was drew comfort from the resilience