The Bank of England said it set up an emergency lending service (Image: Getty)
The said it set up an emergency lending service to stabilise markets during “episodes of severe gilt market dysfunction”.
Banks can already access emergency capital in the form of loans from the central bank; the latest development extends this to other financial institutions including insurance companies and pension schemes.
In September 2022, the price of gilt yields soared after the then Prime Minister Liz Truss and Chancellor Kwasi Kwannger announced £45bn tax cuts.
Markets reacted by selling Government bonds, which sent gilt yields soaring and increased Government borrowing.
The Contingent Non-Bank Financial Institution Repo Facility (CNRF) is only open to those who hold £2billion gilts, although there is other eligibility criteria.
Having the lending facility means companies will not have to sell off their gilt holdings and can instead borrow to make any shortfall in funding.
Gilts are often held by pension funds in order to make sure they can pay out pensions, so the lending facility would enable non-banking financial insitutions to access emergency funding rather than dumping gilts on the market.
The CNRF is now open to applications but will “only be activated at the Bank’s sole discretion during times of severe gilt market stress that threaten UK financial stability”.
The CNRF is a collateralised lending facility that will give cash in return for gilts, which means the gilts act as security on any loan. It also charges an annual fee set at £8,000.
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Vicky Saporta, the Bank of England’s 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 ensure its effective design and implementation, the Bank had welcomed views from firms and industry bodies on the first-of-its-kind facility for the UK.”
Zoe Alexander, director of policy and advocacy at the Pensions Lifetime Savings Association, said: “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.”
David Otudeko, interim director of regulation at the Association of British Insurers, said: “The ABI welcomes the Bank of England’s new CNRF. It is a helpful emergency liquidity tool to be used during periods of severe market dysfunction only, that could temporarily increase demand for liquidity.”