By David Milliken
HELSINKI (Reuters) -Banks operating in Britain should prepare to change their approach to liquidity and make more use of BoE facilities, as ongoing BoE bond sales and other loan repayments drain liquidity, senior Bank of England official Vicky Saporta said on Wednesday.
Liquidity management is a key way in which central banks ensure their official interest rates feed through the financial system to the wider economy and avoid market volatility caused by banks running temporarily short of cash.
Saporta, the BoE’s executive director for markets, said the central bank estimated that the financial system could reach its ‘preferred minimum range of reserves’ as soon as the second quarter of next year.
“Firms must now fully consider the changing liquidity environment and their plans to source reserves within that,” Saporta said in a speech at the Bank of Finland.
“That means borrowing in larger volumes routinely from the Bank, considering their market access, testing operations regularly and thinking actively about levels of pre-positioned collateral,” she added.
Alongside Saporta’s speech the BoE announced changes taking effect next week to its indexed long-term repo facility (ILTR) which allows banks to borrow money from the BoE for a six-month term against a range of collateral.
To date, the facility has seen much less use by banks than its one-week Short Term Repo which often draws more than 60 billion pounds ($80.8 billion) of demand.
The BoE said the weekly amount available at the ILTR would rise to 35 billion pounds from 25 billion pounds, increasing the total amount of liquidity it could provide to Britain’s financial system to 840 billion pounds.
The amount of reserves banks can borrow at the cheapest rate – which requires the highest quality collateral – will rise to 8 billon pounds a week from 5 billion pounds, and the costs of borrowing will rise more gradually when banks borrow more.
($1 = 0.7427 pounds)
(Reporting by Essi Lehto, writing by David Milliken, editing by Sarah Young)
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