MNI INTERVIEW: BOE Urges Signups For Non-Bank Gilt Facility
MNI (LONDON) - Non-banks should sign up quickly to the Bank of England’s new Contingent NBFI Repo Facility in order to benefit from its protection in the event that gilt markets become dysfunctional, BOE Executive Director for Markets Vicky Saporta told MNI, adding that the advent of the CNRF does not mean the BOE will never make temporary use of asset purchases.
The CNRF, the BOE’s first emergency facility for non-banks, which would lend cash against gilt collateral, opened on Jan 28, and Saporta said the first applicants should be approved in weeks.
While recent jitters have put the gilt market in the spotlight, Saporta stressed that the Bank would only trigger the CNRF in cases of severe market stress.
"I hope it's going to be weeks rather than months for the earlier ones to be approved, but it depends on their readiness to show that they have met all the requirements ... We are ready on our side," she said in an interview.
Asked what would happen if gilt markets hit turbulence before the CNRF was fully active, Saporta said "We would encourage firms to sign up as early as possible so ... we don't find ourselves in this position, and the market doesn't find itself in that position either."
The CNRF has been constructed using the lessons of the September 2022 Budget debacle, when the fire sale of gilts by liability-driven investment funds contributed to soaring yields. The CNRF offers LDIs, insurers and pension funds cash in return for gilt collateral.
"It's a very innovative tool that complements the set of tools that we have, but it's also historic, given that it's the first such lending tool that we have targeted to non-banks in our 331 year history," Saporta said. The Bank of Canada appears to be the only peer with a similar scheme, whose implementation does not mean that the BOE will take short-term gilt purchases off its menu of possible responses to market stress.
"The CNRF … is another tool in the toolkit that we didn't have a few years ago. It does not mean that we will never use targeted and temporary asset sales and asset purchases," she said.
CRISIS RESPONSE
It will be the Bank’s executive which decides whether gilt markets have become severely dysfunctional, and Saporta rejected any suggestion that such a decision could itself fuel instability.
"It will actually serve to increase stability in the market, rather than increase instability ... [We] have lots of experience of doing that ... during the Covid crisis, we activated the Contingent Term Repo Facility, which is a close cousin in terms of the way it operates to the CNRF, but it was clear that there was dysfunction out there," Saporta said.
"That was welcomed, and it was part of helping to calm the market. This is what we are going to be doing with it ... it would be apparent to the market why we have activated it. And it needs to be severe dysfunction," she added.
Saporta does not expect the CNRF’s creation to boost demand for gilts as collateral.
"It's aimed at institutions that have their own business model reasons for holding large amounts of gilts," she said.
Saporta's predecessor as BOE markets head, Andrew Hauser, talked about a "grand bargain" with non-banks, strengthening their resilience in return for a central bank backstop, but she does not see it quite that way.
"This is a lending facility of the Bank of England, so we lend to counterparties that have a certain ex-ante resilience, for example, that they are regulated appropriately ... I don't see that necessarily as being any grand bargain. It's just the way that we extend our lending facilities," she said.