Bank of England plans permanent lending facility for non-banks

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The Bank of England is set to create a permanent lending facility for non-bank financial institutions such as insurers and pension funds during times of stress, its markets boss Andrew Hauser said on Thursday.

In a speech Hauser outlined the need to “urgently” plug gaps in the central bank’s current toolkit, which has traditionally been geared towards lending money only to banks, who then lend on to other financial institutions.

Hauser said recent events had shown that banks could not “stabilise the financial system as a whole” during times of crises, alluding to the markets turmoil triggered by the pandemic in 2020 and the 2022 gilts crisis sparked by Liz Truss’s “mini” Budget.

Both periods of market instability led to exceptional, ad hoc interventions by the BoE. Hauser said the bank is concerned the risks from “non-bank financial institutions” is “only set to grow in the years to come”.

His comments echo the concerns of other global policymakers who have warned of the risks of rising interest rates and volatile markets to a sector that now accounts for about half of all financial assets.

In the UK, the balance sheets of non-bank financial institutions have doubled since the financial crisis during a period when traditional banks grew at just over half that rate.

“We urgently need the capacity to lend to NBFIs in a stress,” Hauser told an event in London.

The BoE will embark “with immediate effect” on designing a facility that would allow it to lend to UK insurance companies and pension funds (ICPFs), Hauser said, describing those two groups as the biggest NBFI sellers of assets during both the dash for cash and the UK gilts market crisis.

“We will also — as a second and parallel step — reach out to a broader set of NBFIs active in core sterling markets to explore how access might be expanded beyond ICPFs over time,” Hauser added.

Eligible collateral for the loan facility will be “gilts at a minimum” and the BoE will assess other assets over time, he said.

Hauser argued the permanent facility would be better than the kind of asset purchase schemes the BoE has deployed as improvised solutions when non banks were hit by stresses in 2020 and 2022.

“[Lending to non banks] would materially reduce the risk of confusing perceptions of central banks’ monetary policy stance: secured lending for financial stability purposes is a well-recognised, longstanding part of the central bank liquidity toolkit,” Hauser said.

Separately, the UK Treasury and BoE also on Thursday confirmed plans to relax certain regulations for banks and insurers in a bid to bolster the financial sector after Brexit.

Draft legislation to be introduced early next year will raise the threshold at which banks have to formally separate their retail and investment banking operations to £35bn from £25bn, according to consultation documents.

The revised law will exempt smaller consumer lenders without significant trading operations from the regime entirely and allow ringfenced banks to establish subsidiaries and branches in countries outside the UK and EU.

The BoE also fleshed out reforms of the Solvency II insurance capital rules, which the industry says could unlock as much as £100bn for investment. The central bank is proposing to widen the range of assets eligible for the so-called matching adjustment rules, which will make it easier for insurers to invest in long term projects such as infrastructure.