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Asset choice in British central banking history, the myth of the safe asset, and bank regulation

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  • William A. Allen

    (Cass Business School, London, United Kingdom)

Abstract

The paper describes the use of commercial bills in Bank of England open-market operations from the earliest days of central banking in the 19th century, when, it is suggested, the Bank of England’s main objective was what would now be called macro-prudential, until the 1980s, when commercial bill purchases were an essential feature of contemporary anti-inflationary policy. It explores the relationship between government securities, central bank assets and bank liquidity regulation, exposes as a myth the belief that government securities are perfectly safe assets, and challenges the idea that central banks should confine their asset holdings to government securities. In addition, the paper argues that by making more active use of the policy instrument of central bank asset choice, by acknowledging the connection between liquidity regulation and open-market operations, and by making certain changes to the Basel 3 Liquidity Coverage Ratio regulations, central banks could both better achieve some of their macro-prudential policy objectives and stimulate high-quality bank lending.

Suggested Citation

  • William A. Allen, 2015. "Asset choice in British central banking history, the myth of the safe asset, and bank regulation," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 2(4), pages 18-31, June.
  • Handle: RePEc:sgm:jbfeuw:v:2:y:2015:i:4:p:18-31
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    File URL: http://www.wz.uw.edu.pl/portaleFiles/3842-journal-of-b/articles/jbfe42015/JBFE_2%284%292015_akcept_r2_Allen.pdf
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    References listed on IDEAS

    as
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    9. Churm, Rohan & Radia, Amar & Leake, Jeremy & Srinivasan, Sylaja & Whisker, Rishard, 2012. "The Funding for Lending Scheme," Bank of England Quarterly Bulletin, Bank of England, vol. 52(4), pages 306-320.
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    Cited by:

    1. Leon Wansleben, 2021. "Divisions of regulatory labor, institutional closure, and structural secrecy in new regulatory states: The case of neglected liquidity risks in market‐based banking," Regulation & Governance, John Wiley & Sons, vol. 15(3), pages 909-932, July.
    2. Philip Turner, 2017. "Did Central Banks Cause The Last Financial Crisis? Will They Cause The Next?," National Institute of Economic and Social Research (NIESR) Discussion Papers 484, National Institute of Economic and Social Research.
    3. Philip Turner, 2016. "Macroprudential policies, the long-term interest rate and the exchange rate," BIS Working Papers 588, Bank for International Settlements.

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    More about this item

    Keywords

    commercial bills; bills of exchange; Bank of England; eligibility; bank liquidity; Basel 3; Liquidity Coverage Ratio; overfunding; monetary targets; macroprudential policy; risk-free asset; government securities;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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