Securing Essential Financial Resources when Required
Nat Benjamin, the executive director of financial stability strategy and risk at the Bank of England, delivered a thought-provoking lecture at OMFIF, emphasising the need for a steady-state liquidity environment that supports stability and growth.
The lecture underscored the importance of considering the evolving roles of non-bank financial institutions within the financial system. A significant shift from banks to non-bank financial institutions is highlighted as an evolving role within the financial system. This transition, Benjamin stressed, requires both banks and non-bank financial institutions to manage their liquidity risks prudently, recognising their intertwined impact on system-wide stability.
One of the key areas Benjamin addressed was the normalization of central bank balance sheets. After periods of expansion, managing the normalization of central bank balance sheets carefully is crucial, ensuring policies do not disrupt liquidity flows or financial stability. This involves balancing the need for sufficient incentives for institutions to maintain their own liquidity insurance while avoiding excessive leverage that could destabilize the system.
Another critical consideration is the implications of these transitions for system-wide liquidity flows. Policy frameworks need to ensure funding markets remain liquid and resilient in both normal times and during stress. This includes making liquidity cost-effective enough to maintain market depth without encouraging unsustainable risk-taking.
The lecture also discussed the impact of these changes on businesses' and households' access to essential financial services. Ensuring coherence between monetary operating frameworks and regulatory policies is essential to support a "middle road" that encourages institutions to both manage their own liquidity risks and support overall system liquidity through inter-institutional lending.
Promoting routine, stigma-free use of central bank lending facilities by banks for normal liquidity management is another key point. This enhancement aims to make these facilities more effective during times of market stress.
Learning from past market disruptions, such as the 2022 Liability Driven Investment crisis, is also crucial in improving liquidity risk management among non-bank financial institutions and banks alike.
In summary, Benjamin advocates for a carefully balanced approach that supports a stable liquidity environment by integrating the normalization of central bank policies with recognition of the evolving financial ecosystem, especially the growing prominence of non-bank financial institutions, while safeguarding resilient and inclusive liquidity access across the economy.
The lecture concluded by discussing various aspects of fostering a steady-state liquidity environment, emphasising the importance of understanding the effects of these changes on the financial system as a whole.
In the context of the lecture, it was emphasized that non-bank financial institutions, with their growing prominence, need to manage their liquidity risks prudently, as their actions impact system-wide stability (risk, finance, business). Furthermore, the normalization of central bank balance sheets requires careful management to prevent disruptions in liquidity flows, which can have implications for businesses' access to essential financial services (ai, data, finance, business).
