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Home > News and Publications > 'Sterling Monetary Framework: Annual Report’ Quarterly Bulletin 2014 Q2 pre-release article

'Sterling Monetary Framework: Annual Report’ Quarterly Bulletin 2014 Q2 pre-release article

13 June 2014

Sterling Monetary Framework: Annual Report 2013–14 (155KB)

This is the first in a new series of annual reports, designed to throw light on the operation of the Bank’s published framework for implementing monetary policy and providing liquidity to the banking system, known as the Sterling Monetary Framework (SMF). As recommended by Bill Winters’ review of the SMF, the Report draws on the views of a wide range of internal and external stakeholders to identify areas where the SMF works well, and areas where it might be improved. The Bank’s Court has reviewed this Report and has endorsed its publication.

The key findings relate to:

  • Access to the SMF. Membership of the SMF has broadened considerably, from 70 participants in January 2007 to 139 at the end of 2013–14, with most of this increase coming from smaller or ‘challenger’ banks and building societies. The Bank is assessing the scope for extending SMF membership to some non-bank financial institutions.

  • Implementing monetary policy. Overnight market interest rates remained close to Bank Rate — a primary objective of the SMF — throughout 2013/14. In due course, when market expectations point to a near-term rise in Bank Rate, the Bank will review the approach it intends to take to deliver monetary control. Assessing this will require consideration of a number of complex issues, including the functioning of money markets and the future composition of the Bank’s balance sheet, and will take account of the views of SMF participants and other key stakeholders.

  • Providing liquidity insurance. As the Governor has explained when launching the Bank’s response to the Winters Review in October 2013, the Bank is ‘open for business’ in providing liquidity insurance. Reforms to SMF liquidity insurance facilities announced alongside the Governor’s speech — aimed at providing more liquidity at longer terms and cheaper rates — have been widely welcomed. As expected, use of the SMF facilities remained low in 2013–14, reflecting the large stock of central bank reserves in the system and banks’ improving financial positions.

  • Risk management. The amount of collateral delivered to the Bank for actual or potential use in its facilities (such as the Funding for Lending Scheme and those within the SMF) has increased substantially, and stood at almost £450 billion at the end of February 2014, consisting mainly of portfolios of residential mortgage loans. After valuations and haircuts, this provided banks and building societies with a total drawable value of around £280 billion in the Bank’s facilities. In recent years, the range of eligible collateral has been broadened to include portfolios of corporate loans, social housing loans, unsecured personal loans and revolving credit facilities.

  • Governance. Changes to the internal governance of the SMF – including more active engagement with internal and external stakeholders, and a new annual review process – were announced in October 2013. More details of these changes are contained in the report.

The process of reform triggered by the Winters Review has been a positive development, which the Bank is keen to maintain in the years ahead. The Bank welcomes thoughts or comments from interested parties on this Report or the SMF more broadly. Details of how to submit views are provided at the end of the Report.

The rest of the 2014 Q2 edition of the Bulletin will be published at 00:05hrs on 16 June 2014.


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