Central bank policy on collateral - paper by Paul Fisher

In a paper summarising recent discussions with a range of market contacts, Paul Fisher - Executive Director Markets, member of the Monetary Policy Committee and member of the interim Financial Policy Committee - sets outs the Bank of England's approach to collateral policy, which is driven by a combination of monetary and financial policy objectives and the need to protect the Bank's balance sheet.
Published on 14 April 2011

The Bank expanded significantly the scale of lending and range of collateral acceptable in its sterling market operations in the face of the financial crisis. But central banks, like any other business, need to protect their balance sheet. To that end, Paul Fisher identifies three principles that central banks should look to observe, reflecting: the prospective solvency of creditors; the quality of collateral; and the achievement of public policy objectives. Those principles in turn require decisions about collateral eligibility, valuation, haircuts and exposure limits. He says: "These are important questions for the banking system as a whole, and have presented new and complex risk management challenges for central banks over the past few years."

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