Bank of England Seeks Ability to Lend to Non-Bank Financial Institutions

The Bank of England aims to develop the ability to lend to non-bank financial institutions (NBFIs).

It is doing so to address potential liquidity challenges in core financial markets that could threaten the United Kingdom’s financial stability, the bank said in a final report on its system-wide exploratory scenario exercise.

This exercise explored how the U.K. financial system — including banks, insurers, pension plans, hedge funds, asset managers and central counterparties — would respond to a market shock, it said in the report.

It found that while NBFIs have become more resilient in recent years, that could change over time, and those changes could be amplified by the financial system as a whole, according to the report.

NBFIs could need more liquidity during times of market stress, but banks are unlikely to provide all the additional repo financing the NBFIs seek, the report said.

Having found this during the exercise, the bank plans to meet this challenge with further policy work to increase repo market resilience and with other central bank facilities, per the report.

“The Bank is expanding its tools with the Contingent NBFI Repo Facility (CNRF), which will allow the Bank to provide repo directly to eligible NFBIs if required to address severe gilt market dysfunction,” the report said.

Bank of England Deputy Governor Sarah Breeden said at a conference in February that there should be more research into non-bank lenders to help prevent a “credit crunch” that could result from a pull-back by hedge funds, pension funds, asset managers and insurers.

“A shift in the willingness of market-based finance to lend to corporates, particularly those perhaps that are highly leveraged, would have significant implications for the real economy — a credit crunch sourced in market-based finance rather than bank lending,” Breeden said at the time.

Potential challenges posed by NBFIs have also been noted on the global level.

In July, Financial Stability Board (FSB) Chair Klaas Knot said recent “incidents of market stress and liquidity strains” have shown that NBFIs can cause or worsen systemic risks to the larger financial system.

Writing to a group of finance ministers and central bank governors, Knot said: “Many of the underlying vulnerabilities that contributed to these incidents are still largely in place, leaving the global financial system susceptible to further shocks.”