Andrew Hauser: A journey of 1000 miles begins with a single step - filling gaps in the central bank liquidity toolkit

Speech by Mr Andrew Hauser, Executive Director for Markets of the Bank of England, at a Market News International Connect event, London, 28 September 2023. 

The views expressed in this speech are those of the speaker and not the view of the BIS.

Central bank speech  | 
28 September 2023
by Andrew Hauser
PDF full text
(694kb)
  |  15 pages

Introduction

Introduction In recent decades, households and businesses seeking to save, borrow or access other financial services have increasingly turned away from traditional banks and towards so-called Non-Bank Financial Institutions (NBFIs) – a wide range of firms including broker-dealers, non-bank lenders, pension funds, insurance companies and other investment vehicles. That shift reflects changes in preferences and technology, reduced bank intermediation capacity and the period of low interest rates. And it brings many positives: increasing competition and innovation, driving cheaper, faster and more diverse financial services.

Greater diversity may also help enhance the stability of the financial system as a whole, by increasing the range of intermediation channels, reducing concentration and improving risk sharing. But it's not all one-way: as their scale and range has grown, it's become increasingly clear that NBFIs have the capacity to pose new forms of liquidity risks to financial stability, either directly or through their influence on core financial markets. Well before the recent conflagrations, discussion had already begun about what might be termed a 'Grand Bargain' – in which NBFIs build stronger resilience against idiosyncratic liquidity shocks, while central banks develop new tools to protect system-wide stability against the most severe 'tail risks' posed by these new activities. 

Some progress was made towards this goal – but a comprehensive solution has proved elusive. On the central bank tools side, that reflected three main things:

  • First, the limited number of serious liquidity crises involving NBFIs in the years following the Global Financial Crisis (GFC) caused some to doubt the scale of the financial stability threat;