The Bank of England has opened applications for a new emergency lending tool which is designed to protect pension funds during times of severe market stress.
The Contingent NBFI Repo Facility (CNRF) will provide crucial support to non-banking financial institutions by offering emergency loans during periods of market turbulence.
Vicky Saporta, Bank of England, Executive Director for Markets, said: “Opening for CNRF applications marks a significant step forward in our efforts to deal with future episodes of gilt market dysfunction.
"Having the ability to lend to eligible non-bank financial institutions in times of severe market stress means we are better equipped to protect financial stability for the benefit of households and businesses throughout the UK.”
To use the facility, firms must have at least £2billion worth of gilts. There is also an annual fee of £8,000 for firms that join.
During times of market stress, these firms can borrow up to half of their total gilt holdings.
The Bank will lend directly to insurers, pension funds, and certain investment strategies, with UK Government bonds serving as collateral for the loans.
The central bank has assured that the identities of borrowers will remain confidential to avoid causing wider market concerns.
The CNRF was developed in response to the gilt market crisis of late 2022, initially triggered by former Prime Minister Liz Truss's unfunded tax cut plans.
That crisis was worsened due to forced selling by certain pension funds, which led the Bank of England to step in and buy Government bonds. The CNRF aims to prevent similar situations by offering a more controlled approach to financial support.
The Bank of England explained: "Collateralized lending presents less risk to public funds, lower moral hazard, and reduces unintended spillovers to monetary policy from financial stability interventions.”
However, the facility will not be available to firms facing liquidity pressures unrelated to gilt market turmoil.
Industry groups have largely supported the new facility. Zoe Alexander, Director of Policy and Advocacy at the Pensions Lifetime Savings Association (PLSA), said: "The PLSA strongly welcomes this facility and has been consulted by the Bank during its development.
It will provide greater reassurance to defined benefit pension schemes, and their members, that they will be able to obtain liquidity during periods of market dysfunction.”
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David Otudeko, Interim Director of Regulation at the Association of British Insurers, called it “a helpful emergency liquidity tool to be used during periods of severe market dysfunction only, that could temporarily increase demand for liquidity.”
The facility will be activated only in times of severe stress in the gilt market, acting as a backup to protect financial stability.
Borrowing costs will be set to discourage usage during normal conditions but will be more favorable during times of market distress.
The new tool highlights the increasing importance of non-bank financial institutions in the UK’s financial system.
By providing this backstop liquidity, the Bank of England hopes to reduce the need for these firms to sell assets during times of market stress.
This is the first facility of its kind in the UK, and the Bank of England worked closely with industry firms and bodies during its development.
Bond market turmoil earlier this month drove the UK 10-year gilt yield up to 4.9 per cent, the highest figure recorded since 2008.
The gilt yield has since dipped slightly to 4.6 per cent as the Government has sought to reassure a jittery market, but Chancellor Rachel Reeves has faced pressure to announce tax and spending changes in response to the higher cost of Government borrowing.
Find Out More...
The Contingent NBFI Repo Facility (CNRF) will provide crucial support to non-banking financial institutions by offering emergency loans during periods of market turbulence.
Vicky Saporta, Bank of England, Executive Director for Markets, said: “Opening for CNRF applications marks a significant step forward in our efforts to deal with future episodes of gilt market dysfunction.
"Having the ability to lend to eligible non-bank financial institutions in times of severe market stress means we are better equipped to protect financial stability for the benefit of households and businesses throughout the UK.”
To use the facility, firms must have at least £2billion worth of gilts. There is also an annual fee of £8,000 for firms that join.
During times of market stress, these firms can borrow up to half of their total gilt holdings.
The Bank will lend directly to insurers, pension funds, and certain investment strategies, with UK Government bonds serving as collateral for the loans.
The central bank has assured that the identities of borrowers will remain confidential to avoid causing wider market concerns.
The CNRF was developed in response to the gilt market crisis of late 2022, initially triggered by former Prime Minister Liz Truss's unfunded tax cut plans.
That crisis was worsened due to forced selling by certain pension funds, which led the Bank of England to step in and buy Government bonds. The CNRF aims to prevent similar situations by offering a more controlled approach to financial support.
The Bank of England explained: "Collateralized lending presents less risk to public funds, lower moral hazard, and reduces unintended spillovers to monetary policy from financial stability interventions.”
However, the facility will not be available to firms facing liquidity pressures unrelated to gilt market turmoil.
Industry groups have largely supported the new facility. Zoe Alexander, Director of Policy and Advocacy at the Pensions Lifetime Savings Association (PLSA), said: "The PLSA strongly welcomes this facility and has been consulted by the Bank during its development.
It will provide greater reassurance to defined benefit pension schemes, and their members, that they will be able to obtain liquidity during periods of market dysfunction.”
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David Otudeko, Interim Director of Regulation at the Association of British Insurers, called it “a helpful emergency liquidity tool to be used during periods of severe market dysfunction only, that could temporarily increase demand for liquidity.”
The facility will be activated only in times of severe stress in the gilt market, acting as a backup to protect financial stability.
Borrowing costs will be set to discourage usage during normal conditions but will be more favorable during times of market distress.
The new tool highlights the increasing importance of non-bank financial institutions in the UK’s financial system.
By providing this backstop liquidity, the Bank of England hopes to reduce the need for these firms to sell assets during times of market stress.
This is the first facility of its kind in the UK, and the Bank of England worked closely with industry firms and bodies during its development.
Bond market turmoil earlier this month drove the UK 10-year gilt yield up to 4.9 per cent, the highest figure recorded since 2008.
The gilt yield has since dipped slightly to 4.6 per cent as the Government has sought to reassure a jittery market, but Chancellor Rachel Reeves has faced pressure to announce tax and spending changes in response to the higher cost of Government borrowing.
Find Out More...