British Lenders Borrow $12.7 Billion From Country’s Central Bank

Borrowing by U.K. banks from a certain Bank of England facility is reportedly at the highest level since the pandemic.

As Bloomberg News reported Tuesday (March 4), this is happening as the country’s central banks push to drain extra liquidity from the financial system has led to a rising demand for cash.

Outstanding usage of the Bank of England’s (BOE) Indexed Long-Term Repo (ILTR) facility, or repurchase agreements that provide banks cash in exchange for promising collateral for six months, has surpassed £10 billion ($12.7 billion) for the first time since 2020, the report said.

The sum was reached following £1.33 billion of lending Tuesday, Bloomberg added, a figure that was the most at a single operation since April 2020.

According to the report, the BOE hopes to move markets away from the “abundant liquidity” produced by years of gilt purchases, and provide cash through repo operations instead. However, this shift raises the risk of volatility, leading officials to monitor sterling money markets for signals of tension.

“Money market rates are clearly shifting to levels which suggest that a simple shift from a gilt-based to a repo-based portfolio may not be that easy to implement,” said Pooja Kumra, senior U.K. and European rates strategist at TD Bank.

The ease of the transition is “dependent on how easily the banks can adapt to the lack of the BOE’s footprint in the gilt market,” Kumra added.

Bloomberg noted that the BOE is reversing years of bond purchases while also exiting a program that offered cheap loans to banks to bolster the economy during COVID, taking a more aggressive stance in selling gilts than other central banks, who are also trying to reduce excess liquidity within their systems.

“We’re open for business and welcome continued use of the ILTR. We expect and encourage firms to use our facilities much more,” a bank spokesperson told the news outlet.

In related news, PYMNTS recently looked at the The Clearing House Interbank Payments System (CHIPS), which features a liquidity algorithm that has been unlocking financial institutions’ (FIs) liquidity.

Michael Knorr, senior vice president and lead product manager for CHIPS, told PYMNTS that this in turn improves operations and frees capital to be deployed “downstream” to end customers, thus bolstering the FIs’ own balance sheets.

In describing the algorithm, Knorr said that “as payments come in on its queues, it looks for efficient ways to combine payments before settling them and posting entries.”

The payments offset one another before tapping into liquidity, Knorr added, who said banks’ focus on liquidity is on the rise due to the Basel 3 banking regulations, which increased lenders’ minimum capital requirements.

“The better you can utilize and manage your intraday payments liquidity,” he told PYMNTS, “that frees up the balances that you can use to meet your other short-term liquidity obligations — and regulatory requirements.”