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Here is the latest consolidated balance sheet from the Bank of England. Normally, central bank accounting would not attract any attention. However, these are not normal times.
I will admit to having a less than complete understanding of this balance sheet. I have posted it in the hope that it might inspire a discussion and perhaps gain more clarity.
Here is what I see. First, all the action is on the asset side of the statement. The main aggregates on the liabilities side seem rather stable.
On the assets side, we can easily see the Northern Rock bail out. It is found in the other assets category. That number has exploded since mid-2006. Based on the changes in this item, it would seem reasonable to conclude that the Bank of England has pumped in about ₤32 billion since the bank sank into insolvency.
The other interesting lines are sterling long term reverse repos, and fine tuning reverse repos. Both are positive, Here is where the Bank of England are accumulating assets through providing liquidity. In other words, the bank has taken assets from commercial banks and given out "something". What that "something" is not immediately obvious.
Lets exclude the obvious. It is not cash. If you look on the liabilities side; sterling notes has actually fallen ₤4 billion.
The liquidity is coming from the asset side of the balance sheet and it seems to be coming from two items: a) the ways and means account, which I think comprises of government securities; and b) short term market operations with BoE counterparties.
This latter component sounds like it might government paper taken in by the central bank as part of normal open market operations. In the past, the BoE would have accepted government securities when the banks needed cash. Now, the banks are getting them back through reserve repos. However, I am far from confident in these conclusions and would be happy to be corrected.
One thing is clear, however. The Bank of England's operations have not expanded high powered money. These liquidity operations are very similar to those currently being undertaken by the Federal Reserve. Rather than providing cash, the central bank is providing high quality assets in return for weaker ones.
As you can see, a fair proportion of the Bank's assets are now tied up with bailing out the UK banking system. I estimate that around ₤54 billion out of total assets of ₤97 billion are now being used to prop up the banking system.