The Bank of England opened applications to its new repo facility, designed to provide emergency cash to financial firms beyond the banking sector at times of severe market stress.
The Contingent NBFI Repo Facility will lend directly to insurers, pension funds and so-called liability-driven investment strategies, which will provide U.K. government bonds as collateral for the loans. Firms holding gilts worth £2 billion ($2.5 billion) or more will typically be eligible for access starting on Jan. 28, the central bank said in a statement published on its website.
Lending directly to buy-side firms like pension funds expands the central bank’s purview, which traditionally has relied on commercial banks to manage the liquidity needs of financial markets. It reflects the increasing need to stem risks that nonbanks pose to financial stability.
The central bank began work on the CNRF in response to the gilt market blow-up in late 2022. The crisis was initially triggered by former Prime Minister Liz Truss’s plan for unfunded tax cuts, but was exacerbated by a vicious circle of forced selling among certain leveraged pension fund strategies. The BOE only stemmed the crash by stepping in to purchase long-dated gilts.
Central bank officials would prefer that any future crises are resolved by giving these funds access to liquidity via the CNRF, rather than outright purchases of gilts.
“Collateralized lending presents less risk to public funds, lower moral hazard and reduces unintended spillovers to monetary policy from financial stability interventions,” the BOE said.
The facility is not intended to provide support to firms facing idiosyncratic liquidity or balance sheet pressures, or cash demands arising from other market events that do not result in gilt market turbulence.
Firms will be required to pay an annual access fee of £8,000 and will only be able to borrow up to an equal to 50% of their total gilt holdings. BOE Deputy Governor Dave Ramsden has previously said the identities of firms using the facility would be hidden to avoid spurring a wider crisis.
While the BOE has not disclosed the price of borrowing from the facility, it said costs will be calibrated in a way that deters usage during normal market conditions and looks attractive in times of stress.
