Maintaining Fluid Financial Movements in a Changing International Scene

In the ever-evolving world of finance, the Bank of England has taken a proactive approach to ensure a stable and resilient financial system. The central bank's focus has shifted from solely considering the liquidity needs of banks to also considering the liquidity needs of Non-Bank Financial Institutions (NBFIs).

NBFIs, which account for around half of assets in the global and UK financial system, play a key role in providing a range of financial services to households and businesses. However, the less efficiently private sector funding markets distribute liquidity in normal times, the more likely it is that central banks might have to step in. Recognising this, the Bank of England aims to create a funding and liquidity environment that incentivizes banks and NBFIs to participate actively in private sector funding markets.

Primary responsibility for managing liquidity risks lies with financial institutions themselves, including banks and NBFIs. The Bank of England encourages banks to routinely use its lending facilities without stigma to strengthen stress-readiness. The resilience of core private sector funding markets is crucial, as they underpin a wide set of transactions that support the provision of services to households and businesses.

To achieve this, the Bank of England has implemented a new robust, demand-driven liquidity system centralized around an overhauled Indexed Long-Term Repo (ILTR) facility. This facility increases reserves to £35 billion per operation and smoothes pricing to reduce volatility and promote routine usage rather than emergency reliance. Furthermore, the Bank has introduced multiple safety nets such as the Contingent Term Repo Facility (CTRF) and daily bilateral operations, creating a layered defense against systemic liquidity stress.

The Bank also aims to broaden access and participation in liquidity provision. This includes reducing minimum bid sizes and maintaining a Single Collateral Pool (SCP) model, fostering deeper market involvement by smaller institutions and asset managers. The Bank has also incorporated lessons from past liquidity episodes, informing the prudence expected of non-bank financial institutions in liquidity management.

Moreover, the Bank's approach aligns with evolving regulatory guidance such as IOSCO’s revised liquidity risk management for collective investment schemes. This supports tools like soft fund closures and deferred redemptions to handle liquidity more effectively, especially for open-ended funds investing in less liquid assets.

The Bank's key principles for the new funding and liquidity landscape focus on balancing individual institutions’ liquidity insurance with system-wide liquidity support, while ensuring markets are liquid, resilient, and efficient in both normal and stressed conditions. The goal is to ensure liquidity is affordable and sufficient to maintain market depth in normal times while avoiding excessive leverage that increases the risk of destabilizing runs under stress. These priorities underpin the Bank’s approach to both monetary policy implementation and regulatory oversight in the UK’s evolving funding landscape.

The Bank of England's Executive Director of Financial Stability Strategy, Nathanaël Benjamin, has been instrumental in these changes. The central bank's goal in the new funding and liquidity landscape is to deliver monetary and financial stability while ensuring the continued provision of financial services by NBFIs in a way that avoids unsustainable risk-taking and leverage. The Bank of England wants to avoid any stigma around routine usage of these facilities in normal times and ensure intervention is only necessary in extreme scenarios, not more often.

In conclusion, the Bank of England's new approach to the funding and liquidity landscape is designed to empower NBFIs, encourage efficient liquidity distribution, and maintain a resilient financial system. The Bank's focus on balancing individual institutions’ liquidity insurance with system-wide liquidity support, while ensuring markets are liquid, resilient, and efficient, is a significant step towards achieving these goals.

The Bank of England aims to create a funding and liquidity environment that encourages banks and Non-Bank Financial Institutions (NBFIs) to actively participate in private sector funding markets.
In the new funding and liquidity landscape, the Bank of England has implemented a robust, demand-driven system, centralized around an overhauled Indexed Long-Term Repo (ILTR) facility.
To broaden access and participation in liquidity provision, the Bank has reduced minimum bid sizes, maintained a Single Collateral Pool (SCP) model, and incorporated lessons from past liquidity episodes.
The Bank's Executive Director of Financial Stability Strategy, Nathanaël Benjamin, has been instrumental in these changes, with the goal of delivering monetary and financial stability while ensuring the continued provision of financial services by NBFIs.
The Bank of England's new approach to the funding and liquidity landscape aligns with evolving regulatory guidance such as IOSCO’s revised liquidity risk management for collective investment schemes, supporting tools like soft fund closures and deferred redemptions.
The Bank's key principles for the new funding and liquidity landscape focus on balancing individual institutions’ liquidity insurance with system-wide liquidity support, while ensuring markets are liquid, resilient, and efficient in both normal and stressed conditions, promoting sustainable finance in the industry, business, and banking-and-insurance sectors.