Andrew Hauser, the Bank of England’s head of markets, said that during stressful times it will create a permanent facility to lend money to non-bank institutions like pension funds and insurers.
Hauser, in a speech, emphasized the need to “urgently plug” gaps in the current toolkit of the central bank, which is geared toward lending money to only banks who lend to other financial institutions.
Hauser stated that recent events have shown that banks cannot “stabilise financial system as a entire” in times of crisis. He was referring to the turmoil on the markets caused by the pandemic outbreaks in 2020, and the 2022 gilts crises sparked Liz Truss’s “mini” Budget.
BoE intervened on two occasions in response to market instability. Hauser stated that the bank is worried about the risk posed by “nonbank financial institutions”.
His comments echo those of other global policymakers, who have warned about the dangers of rising interest rates as well as volatile markets for a sector which now represents around half of all financial assets.
The balance sheets of UK non-bank financial companies have more than doubled in size since the financial crises, during a time when traditional banks only grew by a little over half.
Hauser said at an event in London that “we urgently need to be able to lend to NBFIs during a time of stress”.
Hauser stated that the BoE would design a facility “with immediate affect” to allow it to loan to UK pension funds and insurance companies (ICPFs). He described these two groups as being the largest NBFI sellers during the UK gilts crisis and dash for cash.
Hauser said, “We’ll also — as a parallel step — reach a broader group of NBFIs that are active in the core sterling markets and explore ways to expand access beyond ICPFs with time.”
He said that the BoE would assess the other assets in the future.
Hauser said the permanent facility was better than asset purchase schemes that the BoE had deployed as improvised solution when non-banks were hit by stress in 2020 and 2022.
Hauser stated that “[Lending] to non-banks] would reduce the risk of confusion in perceptions about central banks’ monetary policies: secured lending is an established, well-recognized part of the central banks liquidity toolkit.”
Separately, on Thursday the UK Treasury and BoE confirmed their plans to ease certain regulations for insurers and banks in an effort to boost the financial sector following Brexit.
consultation document states that draft legislation will be introduced in early 2019. It will increase the threshold for banks to separate their retail banking and investment banking operations from £25bn to £35bn .
The revised law will completely exempt small consumer lenders who do not have significant trading operations and will allow ringfenced bank to open subsidiaries and branches outside of the UK and EU.
BoE has also outlined reforms to the Solvency II Insurance Capital Rules, which according to the industry could free up as much as £100bn in investment. The central bank proposes to expand the assets that are eligible for so-called matching adjustments rules. This will allow insurers to more easily invest in long-term projects, such as infrastructure.