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British lenders have tapped into the Bank of England’s (BoE) Indexed Long-Term Repo (ILTR) facility at unprecedented levels since the pandemic, borrowing more than £10 billion ($12.7 billion) as the central bank moves to reduce excess liquidity in the financial system.
Surging Demand for BoE’s Liquidity Facility
According to a Bloomberg report on March 4, the BoE’s ongoing efforts to drain surplus liquidity—which had accumulated due to years of government bond (gilt) purchases—have led to increased demand for cash among U.K. banks.
The latest ILTR operation saw banks borrow £1.33 billion in a single transaction, marking the highest lending volume in a single session since April 2020. This facility allows financial institutions to obtain cash by pledging collateral for a six-month period.
The Central Bank’s Shift Away from Gilt Purchases
The BoE aims to move the market away from “abundant liquidity” generated through extensive gilt purchases. Instead, it is steering financial institutions towards repo-based funding. However, this transition has raised concerns over potential market volatility, prompting regulators to closely monitor sterling money markets.
“Money market rates are clearly shifting to levels which suggest that a simple shift from a gilt-based to a repo-based portfolio may not be that easy to implement,” said Pooja Kumra, Senior U.K. and European Rates Strategist at TD Bank.
The success of this transition, Kumra added, depends on how quickly banks can adapt to a financial environment where the BoE is no longer a dominant force in the gilt market.
BoE’s Aggressive Approach to Liquidity Reduction
Unlike other global central banks, which are cautiously unwinding their stimulus programs, the BoE has taken a more aggressive stance, selling off gilts at a faster rate while also withdrawing pandemic-era cheap lending programs.
A BoE spokesperson reaffirmed the central bank’s stance, stating:
“We’re open for business and welcome continued use of the ILTR. We expect and encourage firms to use our facilities much more.”
Broader Liquidity Trends in the Banking Sector
Liquidity management remains a key focus for financial institutions, especially in light of Basel III regulations, which have raised minimum capital requirements for lenders.
In a related development, the Clearing House Interbank Payments System (CHIPS) has introduced a liquidity algorithm that enhances financial institutions’ ability to manage cash flow. Michael Knorr, Senior VP at CHIPS, explained that the system optimizes intraday payments, allowing banks to free up capital for regulatory and operational needs.
“The better you can utilize and manage your intraday payments liquidity, the more balances you free up to meet other short-term liquidity obligations and regulatory requirements,” Knorr noted.
Conclusion
As the BoE accelerates its exit from stimulus measures, the increased reliance on repo operations signals a fundamental shift in the U.K. financial landscape. While this transition introduces new challenges, it also pushes banks to adopt more efficient liquidity management strategies to navigate the evolving monetary environment.
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