Maintaining the smooth flow of funds in a changing worldwide atmosphere

The Bank of England is adjusting its approach to ensure the stability and smooth functioning of the financial system, with a particular focus on non-bank financial institutions (NBFIs). The changing funding and liquidity landscape has significant implications for the availability of liquidity for NBFIs.

The Bank's overarching goal is to deliver monetary and financial stability, with a focus on ensuring liquidity flows to both banks and NBFIs. To achieve this, the Bank has set out three objectives: maintaining the stability of the financial system, promoting the smooth functioning of financial markets, and supporting the effective flow of credit to the real economy.

Banks play a significant role in the provision of liquidity to NBFIs. However, the Bank recognizes the growing importance of NBFIs and the need to expand its focus to include the liquidity needs of these institutions. The Bank aims to encourage the efficient distribution, or recycling, of liquidity across the financial system, and avoid any stigma around routine usage of its facilities in normal times.

Market participants, including NBFIs, should maintain their own liquidity resilience so that these markets can self-stabilize in response to shocks. Banks should take into account their ability to use the Bank of England's lending facilities regularly for routine liquidity management.

The activities of NBFIs provide liquidity and depth in the gilt market, serving as a risk-free benchmark for sterling-denominated debt. NBFIs also play a key role in providing a range of financial services to households and businesses.

In light of the evolving role of NBFIs and the normalization of monetary policy, the key principles for the new funding and liquidity landscape include strengthened oversight and monitoring of NBFIs, recognition and management of increased interconnections between banks and NBFIs, implementation of targeted stress testing frameworks for NBFIs, adaptation to the structural transformation in credit provision, encouraging market innovations that improve liquidity management, maintaining flexibility in policy design, and accounting for demographic and technological trends.

Nathanaël Benjamin, Executive Director of Financial Stability Strategy at the Bank of England, emphasizes the importance of these principles in ensuring a stable and resilient financial system. It is crucial to note that the primary responsibility for managing liquidity risks lies with financial institutions themselves.

Recent years have seen significant changes in the funding and liquidity environment, and the Bank's focus has expanded to include the liquidity needs of NBFIs. 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.

In conclusion, the new funding and liquidity landscape principles emphasize comprehensive risk monitoring and mitigation, systemic interconnection management, stress resilience, regulatory adaptation to sector evolution, and leveraging innovation to enhance liquidity under a normalized monetary policy environment. The less efficiently private sector funding markets distribute liquidity in normal times, the more likely it is that central banks might have to step in. The Bank of England seeks to ensure that liquidity can flow around the financial system to get where it is needed most.

The Bank of England aims to encourage efficient distribution and recycling of liquidity across the financial system, particularly for non-bank financial institutions (NBFIs), to avoid any stigma around routine usage of its facilities.
Banks, in their capacity to provide liquidity to NBFIs, should take into account their ability to use the Bank of England's lending facilities regularly for routine liquidity management.
NBFIs play a significant role in liquidity provision in the gilt market, serving as a risk-free benchmark for sterling-denominated debt and offering a variety of financial services to households and businesses.
In the new funding and liquidity landscape, the Bank of England focuses on strengthened oversight and monitoring of NBFIs, recognizing and managing increased interconnections between banks and NBFIs.
Financial institutions themselves have the primary responsibility for managing liquidity risks, and recent years have seen a normalization of monetary policy, calling for adaptation to the structural transformation in credit provision.
To ensure a stable and resilient financial system, the Bank of England emphasizes comprehensive risk monitoring and mitigation, systemic interconnection management, stress resilience, regulatory adaptation to sector evolution, and leveraging innovation to enhance liquidity in a normalized monetary policy environment.