By David Milliken
LONDON (Reuters) -The Bank of England is aiming for Britain’s financial system to have an “ample” level of reserves rather than a scarcity or the current surplus as it unwinds its past asset purchases, senior official Nathanael Benjamin said on Wednesday.
Benjamin, the BoE’s executive director for financial stability strategy and risk, said that banks with access to BoE liquidity facilities would have incentives not to hoard reserves and to ensure that they spread through the financial system.
“If we get the calibration of incentives right across our monetary operating framework and regulatory frameworks, reserves should be neither scarce nor abundant – just ample,” he said at an event hosted by the OMFIF central banking think tank.
The BoE is currently unwinding its past quantitative easing asset prices at a pace of 100 billion pounds ($134 billion) a year – although some investors think this will slow over the next 12 months – and COVID-era liquidity provided to banks is expiring.
As a result, banks will need to make increasing use of the BoE’s weekly auctions of 7-day and 6-month funds, which they can access in exchange for high-quality collateral such as British government bonds and certain loans.
Benjamin said banks needed to ensure they had sufficient suitable assets to use as collateral both in good times and bad.
“It is important that they … maintain enough ‘dry powder’ to source additional reserves from us in stress and also consider what collateral they have available to source liquidity from private-sector funding markets,” he said.
The growing role of financial firms other than banks in British lending markets also made it important to create incentives so that banks with direct access to BoE liquidity facilities lent funds to other firms, Benjamin added.
To achieve this, the BoE wanted to ensure that banks “would also have incentives not to hoard excess and unneeded liquidity, and would instead redistribute it to the rest of the system where it might be more needed.”
($1 = 0.7472 pounds)
(Reporting by David Milliken; editing by Suban Abdulla, William Maclean)
