Maintaining a steady cash flow in an ever-changing worldwide environment
In the ever-changing world of finance, the 'new normal' for funding and liquidity is taking shape, with a growing emphasis on market-based finance. This shift is particularly relevant for non-bank financial institutions (NBFIs), which now account for around half of the assets in the financial system, according to the Bank of England.
NBFIs, which provide a range of financial services to households and businesses, are operating alongside and in partnership with banks. However, unlike banks, they are not able to hold central bank reserves, do not have the power to create money, and do not have regular access to central bank facilities. This change in the funding and liquidity landscape has implications for the availability of liquidity for NBFIs.
The Bank of England is cognisant of these challenges and is taking steps to address them. The bank encourages avoiding any stigma around routine usage of its facilities in normal times and seeks to encourage the efficient distribution, or recycling, of liquidity across the financial system. The overarching goal is to deliver the Bank of England's core statutory objectives of monetary and financial stability.
Three key objectives within this goal are to ensure continued provision of financial services by NBFIs, avoid unsustainable risk-taking and leverage, and support the financial system's ability to self-manage increased liquidity demands and self-stabilize in severe but plausible stresses. Market participants, including NBFIs, should maintain their own liquidity resilience to allow core markets to self-stabilize in response to shocks.
The bank also wants to create a funding and liquidity environment that incentivizes banks and NBFIs to participate actively in private sector funding markets. Banks should take into account their ability to use the Bank of England's lending facilities regularly for routine liquidity management. The resilience of core private sector funding markets to stress remains crucial, as they underpin a wide set of transactions that support the provision of services to households and businesses.
Regulatory bodies, such as the Financial Stability Board (FSB), are also addressing the liquidity needs of NBFIs. The FSB has issued new recommendations to manage risks related to leverage in the NBFI sector, acknowledging NBFIs’ growing systemic importance and inherent fragility due to liquidity transformation. Central banks are also monitoring liquidity transmission risks arising from NBFIs carefully and developing frameworks to anticipate and mitigate systemic threats linked to NBFI liquidity episodes.
In conclusion, the 'new normal' for NBFIs is characterised by elevated regulatory oversight, a push for improved liquidity resilience, and central banks adapting policy tools to address the systemic and liquidity risks embedded in this growing sector. Nathanaël Benjamin, Executive Director of Financial Stability Strategy at the Bank of England, emphasises the importance of ensuring liquidity can flow around the financial system to get where it is needed most.
- In the ever-changing landscape of finance, the Bank of England acknowledges the growing importance of non-bank financial institutions (NBFIs), which now account for half of the assets in the financial system.
- To address the challenges faced by NBFIs, the Bank of England encourages an efficient distribution of liquidity across the financial system, aiming to achieve monetary and financial stability.
- The bank's objectives include ensuring the continued provision of financial services by NBFIs, avoiding excessive risk-taking and leverage, and supporting the financial system's ability to manage increased liquidity demands.
- The Financial Stability Board (FSB) also addresses the liquidity needs of NBFIs, issuing new recommendations to manage risks related to leverage in the NBFI sector.
- Central banks are carefully monitoring liquidity transmission risks arising from NBFIs and are developing frameworks to anticipate and mitigate systemic threats linked to NBFI liquidity episodes.
- Nathanaël Benjamin, Executive Director of Financial Stability Strategy at the Bank of England, stresses the importance of ensuring liquidity can flow around the financial system, particularly in the sector of banking and insurance, to support the provision of services to households and businesses.
