Bank of England plots crisis liquidity support for insurers
The Bank of England will supplement its tool kit for battling liquidity crises with a new facility for supporting insurers and other non-bank financial institutions, the BoE's executive director for markets Andrew Hauser told a market crowd gathered at Chartered Accountants’ Hall in London.
“The past three years have been a serious wake-up call,” Hauser said of prior assumptions that the growth in non-bank financial institutions was under control, countered by prudential oversight or manageable indirectly via the BoE’s standard facilities for lenders.
He cited strains in the US repo markets in 2019, the 2020 ‘dash for cash’ and both the “near collapse” of financial commodity market functioning and the UK’s LDI (liability driven investment) fund crisis in 2022.
The first step will be creation of a facility to lend to insurance company and pension funds, including the redesigned LDI (liability driven investment) funds that caused the panic in 2022. The BoE will later open talks with other non-bank financial institutions about how to extend eligibility.
Central bank policy makers will continue to rely on bank lending facilities as their first line of defence, including for shocks hitting the non-bank institutions, and hold new facilities for situations in which banks cannot or will not lend through.
The goal: “a new generation of lending tools to help underpin financial stability during periods of exceptional liquidity stress, channelling liquidity directly to resilient NBFIs when capacity constraints prevent banks from lending in sufficient size.”
Insurance companies are considered “at the stronger end of the spectrum” amongst the extended range of institutions being targeted. Liquidity risk management and duration matching requirements have cut worries, but the group nonetheless proved a material part of gilt selling in recent market crises. Other non-bank institutions have more exotic funding schemes and a larger liquidity mismatch, he indicated.
The larger spectrum of non-bank financial institutions “have introduced important new sources of systemic risk, and our current toolkit – though effective – is incomplete, with bank lending tools unable always to reach the source of the problem.”
Hauser provided no timeline for the process or implementation and admitted that a handful of legal and operational barriers need to be navigated.
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