(Bloomberg) -- The Bank of England needs to shift the perception that its liquidity facilities for banks are primarily crisis-management tools, according to Debbie Cunningham, chief investment officer for global liquidity markets at Federated Hermes.
Cunningham, who says she meets BOE staff regularly, said UK policymakers should reframe their existing tools or introduce new facilities to ensure commercial lenders have easy access to liquidity whenever they want, without stigma.
“Maybe that’s something that should be addressed, because generally if something comes about in a stressed market, it’s thought of as a bailout, it’s thought of as something that’s negative,” Cunningham said at a media briefing Tuesday at the firm’s London offices.
The central bank, which is expected to hold its key rate steady on Thursday, has various liquidity programs in place to ensure monetary and financial stability, though demand varies.
Lenders are borrowing record amounts of liquidity via the short-term repo — or STR — instrument. It was introduced in October 2022 to address disruptions to shorter-maturity borrowing costs as the central bank shifts from providing abundant excess liquidity toward a demand-driven system.
But participation in the so-called Indexed Long-Term Repo facility, which allows market participants to borrow central bank reserves for six months, remains limited. Vicky Saporta, the BOE’s executive director for markets, recently urged market participants to make greater use of operations beyond the STR as excess reserves decline.
Rhetorical Repositioning
According to Cunningham, the BOE may be able to reposition its existing facilities on a “rhetorical” basis. While the introduction of new tools for banks is also an option, she said BOE policymakers seem unlikely to take that route for now.
“Whether the Bank of England is ready to do that or not is questionable,” Cunningham added.
The Federal Reserve’s liquidity plumbing could provide a blueprint for a wider range of repo facilities at the BOE.
The Fed has standing repo and reverse repo facilities — known as SRF and RRP — designed to either add or mop up liquidity within the financial system as needed. While use of the RRP has been declining in response to the US monetary authority’s quantitative tightening program, market conditions have yet to spur increased usage of the SRF.
The RRP “has been a problem solver in the marketplace and I think it would be really a good move for other central banks to go down a similar path,” Cunningham said.
S&P Global Ratings raised similar concerns over the potential stigma of central bank facilities in a note published Tuesday. Both the BOE and the European Central Bank should ensure that banks are “operationally prepared” to access them, its authors wrote.
S&P said it takes a positive view on banks that ensure they can access central bank facilities quickly, for example by pre-positioning eligible assets to post as collateral.
--With assistance from Greg Ritchie.
(Updates with additional context and comment from paragraph nine.)
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