The Bank of England has today widened access to its “back-stop” loans to include broker-dealers and central counterparties (CCPs) for the first time.
The inclusion of these two groups within the Sterling Monetary Framework is “designed to recognise the important role” they play in the financial services industry and the wider economy, the Bank said. The “back-stop” loans will help provide liquidity to the financial system in times of stress.
From today, broker-dealers “deemed critical to the stability of the UK financial system” and UK-authorised CCPs can apply for participation in the framework, including the discount window facility.
The widening follows a speech given by governor Mark Carney in June, when he noted that “recognising the centrality of markets doesn’t mean the Bank has a naïve faith that all markets always function smoothly. The City’s markets are not those of a textbook”.
We all know that real markets can seize up in crises of confidence, threatening financial stability and the wider economy.
Just as there will be times when central banks must backstop the banking system, there are also times when they should backstop core markets in a way that supports their contribution to the real economy but doesn’t encourage excessive risk taking.
The changes are detailed in the Bank's updated Red Book, which is here.