Klemperer's product-mix auction lets the Bank of England lend against risky collateral.

A central bank that lends against a range of collateral has to decide how much to lend against risky versus safe assets, and at what price spread. A fixed rule gets that wrong when conditions change.

The Bank of England used Klemperer's product-mix auction for its Indexed Long-Term Repo operations, introduced in 2010. The PMA determines jointly the quantities lent against each collateral set (Level A gilts versus Level B sovereign and asset-backed debt) and the relative price, in one round.

Comparing the PMA to a pair of separate simultaneous auctions or a fixed reference-price auction, the Bank found it raised welfare by roughly 50%, around 2 basis points per loan, and simulations showed larger gains in a genuinely stressed period.

One auction that splits funds across collateral types

Setting both the quantities and the price spread jointly lets the mix react to demand in a single round

It maximises total welfare when bidders bid true values, unlike preset-quantity or fixed-price designs

It shifts more funds to less-liquid collateral in stress, which simpler designs cannot do

For a facility that serves several kinds of collateral, run one auction that allocates across them jointly, so the mix responds to stress instead of being preset.

The ILTR became a permanent part of the Bank's Sterling Monetary Framework, and the design was refined with Klemperer and Elizabeth Baldwin in 2014. The Independent Evaluation Office praised how it responded automatically to liquidity stress, and it has since informed auction design at other central banks, including Banco de México.