Maintaining the fluidity of financial transactions in a changing international environment
In a recent speech at an OMFIF-Bank of England lecture, Nathanaël Benjamin, Executive Director of Financial Stability Strategy, addressed the evolving funding and liquidity landscape. The focus is on the growing importance of non-bank financial institutions (NBFIs) and the Bank of England's role in supporting their liquidity needs to ensure financial stability.
Today, NBFIs represent around half of financial system assets globally and in the UK. They play a vital role alongside banks, providing diverse, cheaper financial services and supporting liquidity in markets such as the gilt market, which underpins sterling-denominated debt.
The Bank of England aims to create an environment where both banks and NBFIs actively participate in private funding markets without hoarding liquidity excessively. This approach encourages the efficient distribution and recycling of liquidity across the financial system.
The resilience of private sector funding markets is a key focus, and the Bank encourages market participants, including NBFIs, to maintain their own liquidity resilience. This self-stabilization can reduce the need for central bank interventions in response to most shocks.
However, the Bank acknowledges that liquidity risk cannot be eliminated entirely. Some severe shocks may require central bank intervention. To address this, the Bank's toolkit includes instruments like the Contingent Non-Bank Resolution Facility (CNRF) to provide liquidity support when needed, especially considering the systemic role of NBFIs.
The shift of riskier activities from banks to NBFIs over the past decade requires vigilant management of non-bank leverage and liquidity risks to prevent financial instability.
Central bank reserves play a significant role in how liquidity flows through the system. However, NBFIs are not able to hold central bank reserves. Banks, on the other hand, should take into account their ability to use the Bank of England's lending facilities regularly for routine liquidity management.
The funding and liquidity environment has been changing over recent years. The 'new normal' for funding and liquidity has to take account of the growing importance of market-based finance. Banks and other financial institutions are appropriately incentivized to lend to one another, including in stress, thereby achieving an effective degree of liquidity recycling across the whole ecosystem.
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. The overarching goal is to deliver the Bank of England's core statutory objectives of monetary and financial stability by maintaining the resilience of the financial system, promoting competition in the financial sector, and supporting the effective flow of credit to the real economy.
In summary, the new funding and liquidity landscape is shaped by the substantial role of non-bank financial institutions, necessitating a regulatory and central banking approach that promotes efficient liquidity distribution, market resilience, and targeted central bank support only in exceptional circumstances to maintain vital financial services to the economy. The primary responsibility for managing liquidity risks lies with financial institutions themselves, and the Bank of England seeks to ensure that liquidity can flow around the financial system to get where it is needed most.
- Acknowledging the growing importance of non-bank financial institutions (NBFIs), the Bank of England is focused on supporting their liquidity needs to ensure financial stability.
- In the UK, NBFIs currently represent half of the financial system assets and play a crucial role, providing diverse, cheaper financial services and supporting liquidity in markets like the gilt market.
- The Bank of England aims to create an environment where NBFIs actively participate in private funding markets, encouraging efficient liquidity distribution and recycling.
- To maintain their own liquidity resilience, the Bank encourages market participants, including NBFIs, to manage risks proactively, reducing the need for central bank interventions during common shocks.
- The Bank's toolkit includes instruments like the Contingent Non-Bank Resolution Facility (CNRF) to provide liquidity support when needed, specifically for addressing liquidity risks associated with NBFIs.
- In a changing funding and liquidity landscape, the Bank of England looks towards an approach that promotes efficient liquidity distribution, market resilience, and targeted central bank support in exceptional circumstances.
- In an increasingly market-based finance world, promoting competition, enhancing financial stability, and facilitating the effective flow of credit to the real economy are essential personal-finance, business, data-and-cloud-computing, technology, sustainable, and AI goals of the Bank of England's policy.
