Maintaining the smooth circulation of funds in an ever-changing worldwide environment
In the evolving landscape of the global financial system, non-bank financial institutions (NBFIs) have emerged as significant players, accounting for around half of assets in the financial system, both globally and in the UK. This structural shift, which has seen NBFIs provide critical financial services such as financing, insurance, hedging products, and long-term savings, has also introduced new risks relating to liquidity needs and market stress.
The Bank of England, with its core statutory objectives of delivering monetary and financial stability, is responding to this change by adapting its financial stability framework to better include NBFIs' liquidity needs alongside banks'.
One of the key strategies is conducting stress tests and scenario analyses focused specifically on NBFI vulnerabilities and their interactions with banks. This is aimed at understanding and mitigating contagion risks.
Another important aspect is ensuring that liquidity flows to where it is needed most across the financial system. This ensures that both NBFIs and banks alike have adequate funding to operate effectively.
Regulatory oversight and supervisory tools are also being promoted to enhance the resilience of the non-bank sector. This includes addressing leverage risks that can pose threats in stressed market conditions without unnecessarily restricting market efficiency.
The Bank of England is also extending policy considerations to associated infrastructure like non-UK central counterparties (CCPs), ensuring systemic risks are managed across the financial ecosystem, which includes NBFIs' clearing activities.
The Bank of England's evolving approach reflects the "new normal" where NBFIs are central players in funding markets, requiring tailored liquidity support mechanisms and regulatory attention alongside traditional banking institutions to maintain overall financial stability.
Primary responsibility for managing liquidity risks lies with financial institutions themselves, including both banks and NBFIs. Market participants, including NBFIs, should maintain their own liquidity resilience to support the self-stabilization of private sector funding markets in response to shocks.
The resilience of core private sector funding markets to stress remains crucial as they underpin a wide set of transactions that ultimately support the provision of services to households and businesses.
Banks play a significant role in the provision of liquidity to NBFIs. The Bank of England wants to create a funding and liquidity environment which incentivizes banks and NBFIs to participate actively in private sector funding markets.
The Bank of England seeks to ensure that liquidity can flow around the financial system to get where it is needed most and encourages the efficient distribution, or recycling, of liquidity across the financial system. The funding and liquidity environment has been changing over recent years, and the Bank of England wants to avoid any stigma around routine usage of these facilities in normal times.
Nathanaël Benjamin, Executive Director of Financial Stability Strategy at the Bank of England, is leading these efforts. Central bank reserves are playing a significant role in how liquidity flows through the system. The Bank of England wants to encourage banks to take into account their ability to use the Bank of England's lending facilities regularly for routine liquidity management.
[1] Financial Stability Report, Bank of England, November 2020 [2] Speech by Nathanaël Benjamin, Executive Director of Financial Stability Strategy, Bank of England, November 2020 [3] Bank of England Financial Stability Report, May 2021 [4] Bank of England, Policy Development Group, October 2020 [5] Bank of England, Financial Policy Committee, November 2020
- The Bank of England's financial stability framework has been adapted to better address the liquidity needs of non-bank financial institutions (NBFIs), acknowledging their increasing significance in the global financial system.
- To mitigate contagion risks, the Bank of England is conducting stress tests and scenario analyses on NBFI vulnerabilities and their interactions with banks, focusing on understanding and managing associated risks.
- Ensuring liquidity flows efficiently across the financial system is important, as it helps both NBFIs and banks maintain adequate funding to operate effectively.
- Regulatory oversight and supervisory tools are being updated to increase the resilience of the non-bank sector, addressing leverage risks that can potentiate threats in stressed market conditions without compromising market efficiency.
- The Bank of England is extending policy considerations beyond traditional banking institutions to include associated infrastructure like non-UK central counterparties (CCPs), managing systemic risks across the financial ecosystem, including NBFIs' clearing activities.
- The Bank of England seeks to create a funding and liquidity environment that encourages active participation from banks and NBFIs in private sector funding markets, ensuring liquidity can flow efficiently to where it is needed most, and avoiding any stigma associated with routine usage of facilities in normal times.
