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Investing.com -- Banks in the UK should reassess their liquidity strategies and make greater use of Bank of England (BoE) lending facilities, Reuters reported on Wednesday, citing Vicky Saporta, the BoE’s executive director for markets.
She noted that continued BoE bond sales and upcoming loan repayments are set to reduce the amount of liquidity in the financial system.
Effective liquidity management is crucial for ensuring that central bank interest rates influence the broader economy as intended and for preventing financial instability caused by temporary cash shortages among banks.
Saporta indicated that the financial system might reach the BoE’s "preferred minimum range of reserves" as early as the second quarter of next year.
Speaking at the Bank of Finland, Saporta urged financial institutions to proactively adjust to the evolving liquidity landscape by planning how they will access reserves, the report added.
Specifically, she recommended borrowing larger amounts regularly from the BoE, monitoring market access, participating in testing operations, and managing prepositioned collateral more strategically.
Coinciding with her remarks, the BoE revealed enhancements to its indexed long-term repo (ILTR) facility, effective next week.
This program enables banks to borrow funds from the BoE for six months using a variety of collateral types.
Although banks have typically favored the one-week Short Term Repo, which often attracts over £60 billion in demand, the ILTR will now see its weekly capacity increase from £25 billion to £35 billion. This change boosts the BoE’s total potential liquidity provision to £840 billion, the report said.
Additionally, the ceiling on reserves banks can access at the most favorable rate, secured with the highest-quality collateral, will rise from £5 billion to £8 billion per week, and borrowing costs will increase more gradually as demand rises.