BoE sets out design for new financial stability tool
25 July 2024 UK
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The Bank of England (BoE) has set out the expected design for a new financial stability tool, which aims to address episodes of severe dysfunction in the UK gilt market.
In September 2023, work had begun to develop a new lending facility to address severe market dysfunction that 鈥渢hreatens UK financial stability鈥� arising from shocks that temporarily increase non-bank financial institutions鈥� (NBFIs) demand for liquidity.
As a first step, the BoE is developing the Contingent NBFI Repo Facility (CNRF) which will open applications for users in Q4 2024.
The CNRF would be activated at the Bank鈥檚 discretion in episodes of severe gilt market dysfunction that threaten UK financial stability, to lend cash against gilt collateral to eligible insurance companies, pension funds, and liability-driven investment (LDI) funds for a short lending term.
As NBFIs continue to grow in significance both in terms of total market footprint and influence over the supply of finance to UK businesses, the impact NBFIs have on financial stability has increased, the bank says.
Within the recently published explanatory note from the BoE, the entity explains how past events, such as the 2020 鈥榙ash for cash鈥� and 2022 LDI episodes, have shown that vulnerabilities in NBFIs can propagate liquidity stresses in the gilt market, for example via investor deleveraging, liquidity mismatches in funds, liquidity demands from margin calls and insufficient market participant preparedness to meet them.
鈥淭hese have all led to periods of forced selling of gilts by NBFIs, which have been exacerbated by limited dealer intermediation capacity,鈥� the BoE adds.
The Bank is expanding its toolkit for addressing severe gilt market dysfunction that threatens UK financial stability in two phases.
Developing the CNRF is the first stage. In parallel, the Bank is exploring how to design a facility that would enable broader access, to include more ICPF counterparties and reach a broader set of NBFIs that are relevant to the functioning of UK core markets.
In September 2023, work had begun to develop a new lending facility to address severe market dysfunction that 鈥渢hreatens UK financial stability鈥� arising from shocks that temporarily increase non-bank financial institutions鈥� (NBFIs) demand for liquidity.
As a first step, the BoE is developing the Contingent NBFI Repo Facility (CNRF) which will open applications for users in Q4 2024.
The CNRF would be activated at the Bank鈥檚 discretion in episodes of severe gilt market dysfunction that threaten UK financial stability, to lend cash against gilt collateral to eligible insurance companies, pension funds, and liability-driven investment (LDI) funds for a short lending term.
As NBFIs continue to grow in significance both in terms of total market footprint and influence over the supply of finance to UK businesses, the impact NBFIs have on financial stability has increased, the bank says.
Within the recently published explanatory note from the BoE, the entity explains how past events, such as the 2020 鈥榙ash for cash鈥� and 2022 LDI episodes, have shown that vulnerabilities in NBFIs can propagate liquidity stresses in the gilt market, for example via investor deleveraging, liquidity mismatches in funds, liquidity demands from margin calls and insufficient market participant preparedness to meet them.
鈥淭hese have all led to periods of forced selling of gilts by NBFIs, which have been exacerbated by limited dealer intermediation capacity,鈥� the BoE adds.
The Bank is expanding its toolkit for addressing severe gilt market dysfunction that threatens UK financial stability in two phases.
Developing the CNRF is the first stage. In parallel, the Bank is exploring how to design a facility that would enable broader access, to include more ICPF counterparties and reach a broader set of NBFIs that are relevant to the functioning of UK core markets.
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