Securing Access to Needed Financial Fluidity
Nat Benjamin, the executive director of financial stability strategy and risk at the Bank of England, recently delivered a lecture at OMFIF where he outlined several key considerations for fostering a steady-state liquidity environment that supports stability and growth.
The lecture emphasized the importance of taking a holistic view, considering both the normalization of central bank balance sheets and the evolving roles within the financial system. One of the significant shifts highlighted was the move of liquidity roles from traditional banks towards non-bank financial institutions (NBFIs).
To ensure efficient system-wide liquidity flows, the lecture stressed the need for a middle path in monetary and regulatory policies. This approach would provide incentives for individual institutions to maintain liquidity buffers for their own insurance while also encouraging them to support the liquidity of the system overall by lending in financial markets.
Maintaining liquid and resilient funding markets in both normal and stressed conditions was another crucial aspect. This involves keeping liquidity cheap enough to promote sufficient market depth under normal circumstances without encouraging excessive leverage that could lead to systemic stress.
Primary liquidity risk management responsibility lies with financial institutions themselves, including both banks and NBFIs. Banks are encouraged to use central bank lending facilities routinely, without stigma, to enhance liquidity management effectiveness, especially in stressed times. NBFIs should learn from past market disruptions and adopt prudent liquidity risk management practices.
The lecture also highlighted that banks’ liquidity positions affect their willingness to lend liquidity to NBFIs, a factor that is significant since banks play a vital role in providing liquidity to these institutions.
In conclusion, these considerations aim to create a balanced, resilient liquidity environment that supports financial stability and economic growth by adapting to the financial system’s changing structure and the ongoing normalisation of central bank balance sheets. The lecture underscored the importance of considering the implications of shifts from banks to non-bank financial institutions for system-wide liquidity flows and the need for a holistic view in addressing the challenges and opportunities presented by the evolving roles within the financial system.
[1] The lecture addresses how changes in liquidity flows affect households' access to essential financial services. [2] The lecture discusses in depth how these changes impact businesses' access to essential financial services. [3] The lecture explores the implications of these changes for system-wide liquidity flows in detail.
[1] In light of the shift in liquidity roles from traditional banks to non-bank financial institutions (NBFIs), the lecture delves into the potential impact on businesses' access to essential financial services, essential for fueling growth and stability.
[2] Recognizing the evolving roles within the financial system, the lecture emphasizes the significance of understanding the consequences of changing liquidity flows for households' access to fundamental financial services, supporting their well-being and economic stability.
