Maintaining the circulation of funds in an ever-changing international environment
In a recent lecture at the OMFIF-Bank of England event, Nathanaël Benjamin, the Bank of England's Executive Director of Financial Stability Strategy, outlined the key principles shaping the evolving funding and liquidity landscape, particularly focusing on non-bank financial institutions (NBFIs).
The resilience of core private sector funding markets is vital, as they support the provision of services to households and businesses. However, the funding and liquidity environment has undergone significant changes over recent years. To maintain a coherent approach, the Bank of England aims to ensure that funding markets are liquid and resilient, not just in normal times, but also during stressed periods.
Banks play a significant role in the provision of liquidity to NBFIs. The Bank of England encourages banks to use their lending facilities regularly for routine liquidity management, but also wants to discourage hoarding of liquidity by banks and NBFIs. On the other hand, NBFIs are not able to hold central bank reserves, create money, or have regular access to central bank facilities. This presents a unique challenge in the new funding and liquidity landscape.
Central bank reserves play a key role in how liquidity flows through the financial system. Ensuring liquidity flows to NBFIs as well as banks is a priority. To achieve this, NBFIs must maintain their own liquidity resilience to allow private sector funding markets to self-stabilize in response to shocks.
The Bank of England emphasises the importance of robust risk management frameworks for all financial entities, including banks interacting with NBFIs. These frameworks involve assessing core financial risks, understanding asset classes, maintaining strong control environments, and having contingency plans, all of which are relevant to funding and liquidity risk in the NBFI sector.
Regulatory clarity and flexibility are also crucial. Recent regulatory actions provide clearer frameworks and alternatives in compliance procedures, which indirectly affect liquidity and funding dynamics by facilitating more streamlined operations. This supports the integration of digital assets and new financial technologies into the broader ecosystem, promoting responsible growth while managing risks.
Maintaining financial stability and inclusion remains a priority. The Bank of England aims to avoid disruptions in funding access, including for NBFIs, and ensure the financial system supports diverse participants without undue restrictions motivated by reputational or non-risk-based considerations.
The overarching goal is to deliver the Bank of England's core statutory objectives of monetary and financial stability, with three objectives within that goal: normalising monetary policy, ensuring financial stability, and promoting the effective operation of markets and the integrity of the UK financial system.
Interested readers can subscribe to OMFIF's newsletter for more on this topic. The 'new normal' for funding and liquidity needs to take account of the growing importance of market-based finance. The speech can be read in full here, and a video of the lecture can be found here.
- Nathanaël Benjamin highlighted the essential principles guiding the transformation of funding and liquidity landscapes, particularly focusing on non-bank financial institutions (NBFIs).
- The Bank of England encourages banks to manage their liquidity using regular lending facilities, while discouraging hoarding by both banks and NBFIs.
- Given that NBFIs cannot hold central bank reserves, have the ability to create money, or access central bank facilities regularly, this creates a unique challenge in the current funding and liquidity landscape.
- Ensuring liquidity flows to NBFIs as well as banks is a priority, requiring NBFIs to maintain their own liquidity resilience to allow private sector funding markets to self-stabilize in response to shocks.
- Robust risk management frameworks are crucial for all financial entities, including those interacting with NBFIs, involving assessing core financial risks, understanding asset classes, maintaining strong control environments, and having contingency plans.
- Regulatory clarity and flexibility are necessary, with recent regulatory actions providing clearer frameworks and alternatives, indirectly influencing liquidity and funding dynamics, and facilitating the integration of digital assets and new financial technologies.
- To achieve the Bank of England's core statutory objectives of monetary and financial stability, maintaining financial stability and inclusion is paramount, with a focus on avoiding disruptions in funding access, including for NBFIs.
