Bank of England Governor Mark Carney unveiled an overhaul of the central bank’s money-market operations to widen access and cut the cost of liquidity insurance to the financial system.
The BOE will expand the range of collateral it accepts in its facilities and offer money for longer periods on cheaper terms, Carney said in a speech in London late yesterday. Officials will also consider making some liquidity tools available to a wider array of institutions.
The move broadens Carney’s revamp of the BOE since taking charge in July, and follows an independent review into the bank’s liquidity operations. The former Bank of Canada governor has made changes to monetary policy by introducing guidance on the forward path of interest rates, and brought in McKinsey & Co. to advise on its strategy after it took on expanded powers.
“We are building a liquidity framework for the markets of tomorrow,” Carney said. “These efforts will help set the stage to improve further the supply of credit within the U.K.”
The overhaul of the central bank’s Sterling Monetary Framework will expand monthly indexed long-term repo auctions, and aims to reduce the price and stigma of banks using its bilateral Discount Window Facility, the bank said in a separate document.
The bank will retain its temporary Extended Collateral Term Repo Facility providing funding against the widest range of collateral, and expand the collateral accepted in its facilities to include the drawn portions of corporate revolving credit facilities.
“We are offering money and collateral for longer terms, Carney said. ‘‘The range of assets we will accept in exchange will be wider, extending to raw loans and, in fact, any asset of which we are capable of assessing the risks.’’
In some cases, fees for using facilities will be cut by more than half, he said.
The governor said demand for the BOE’s liquidity facilities will increase as its quantitative-easing program and credit-boosting Funding for Lending Scheme are wound down, and as regulators tighten regulation.
‘‘The management of collateral will become more important and the central bank can play a role in ensuring that those markets are always there so when there’s a shock to those markets, firms have an alternative,” Carney told reporters at a press conference after his speech. “Our job is to make sure that that is still the case three years, five years, 10 years down the road.”
Carney’s comments show that officials “are going to be much more flexible in terms of the assets and the collateral they will accept, if they help out banks,” Andrew Sentance, a former BOE policy maker, said in an interview on Bloomberg Television today. “Hopefully it’s something we won’t need. It’s a contingency plan.”
In the absence of global standards on how lenders should structure themselves so they can be easily unwound if they go bust, national supervisors have been seeking “to protect their own interests,” threatening London’s competitiveness as a financial center, Carney said in his speech.
Where agreements have been made between regulators in different countries on how to resolve international banks, they need to be “backed up by harsh economic incentives,” he said.
The Financial Stability Board, a global group of regulators and central bankers which Carney leads, will develop guidelines on the subject by the Group of 20 Nations meeting next year in Brisbane in Australia, Carney said.
London should lead reforms to make the fixed income and derivative financial markets more transparent and more resilient along the lines of equity markets, Carney said.
Since the financial crisis, global banks have raised $500 billion of new equity and are on course to meet the Basel III regulatory standards more than four years in advance of their deadline, he said. In the U.K., all major banks and building societies have “credible plans” to achieve the BOE’s capital and leverage thresholds, Carney said.
Responding to the government’s move this month to allow Chinese banks to set up branches to establish London as a hub for offshore yuan trading, he said they won’t be able to take deposits unless they can be easily wound down in a crisis.
“Helping the internationalisation of the renminbi is a global good, consistent with London’s historic role,” he said. Still, “our risk appetite for foreign branches will largely be determined by whether their activities in the U.K. are covered by credible recovery and resolution plans.”