Resilience and readiness across the Sterling Monetary Framework

By Vicky Saporta^{footnote [1]}

Central bank balance sheet transition continues to progress and facility usage is continuing to broaden and normalise.

Usage of our market-wide facilities has broadened and normalised as firms become more familiar with the framework. Short-Term Repo (STR) borrowing now regularly reaches around £100 billion with over 30 firms typically bidding in a given auction. Indexed Long-Term Repo (ILTR) usage stands at roughly £70 billion, with total participation from around 80 firms and with an average of 17 firms typically bidding in each recent auction. This broad, regular, usage from a wide range of business models across the sector is both intended and welcome.

As a notable recent development in the transition away from crisis-era interventions, by October last year we saw the repayment of the vast majority of remaining drawings under the Term Funding Scheme with additional incentives for SMEs (TFSME), leaving the outstanding stock of extended drawings at only £42 billion, from a peak of £193 billion in 2021. The actual TFSME unwind was largely brought forward by firms making early repayments, which smoothed the unwind and avoided a contractual cliff-edge repayment date last October. As a result of this smoothed repayment profile, we had a period of gradually and consistently falling reserves which was managed well by firms.^{footnote [2]}

Reserves drains are therefore now driven primarily by QT, with sales continuing to progress gradually and with periodic, larger redemptions of gilts held in the Asset Purchase Facility (APF), but without the imminent prospect of further TFSME unwind. This is illustrated in Chart 1 – in the scenario labelled in solid lines ie holding our repo lending constant at current levels, reserves drains driven by QT follow a downward path as gilt sales are made but with notable jumps due to larger maturities of gilts held in the APF. The most recent APF-held gilt maturity was in January, which produced around a £20 billion reserves drain. The January event passed smoothly, with minimal repo market volatility.

Chart 1: Estimates for the forward path of Bank of England reserves

Put together, these developments – normalised facility usage and more irregular reserves drains – mean there can be periods where actual aggregate reserves appear stable or even rise despite an underlying downward trend. This is illustrated by the scenario in dashed lines on Chart 1, in which repo lending continues to increase. This behaviour is inherent in a system where reserves are being gradually reduced while also being supplied elastically through lending operations that meet, by design, fluctuations in demand.

But short periods of aggregate reserve stability or even periods of rising reserves, do not necessarily mean we have reached the point at which there are no ‘excess’ reserves in the system, a point often referred to as the Preferred Minimum Range of Reserves (PMRR). This is because, over a longer horizon, reserves drains directly caused by QT can be, and are still, larger than any offsetting increases in usage of our facilities. Against this background, the PMRR survey estimate remains a useful, though imprecise, guide to the two core components of the actual steady-state PMRR: demand for reserves for payments activities and precautionary demand for liquidity. The most recent PMRR survey suggests a range of £365 billion–£515 billion, below the current stock of reserves, which currently stands at around £640 billion and similar but slightly lower than the previous survey of £375 billion–£540 billion.

A broad set of factors are taken into consideration by firms in determining their actual reserves holdings. Some lie outside of the Bank's sole direct control, such as the returns available on other forms of high-quality liquid assets and sterling money market dynamics. Some are determined by the Bank and its policy committees such as the design and terms of our facilities and prudential regulation. Firms’ confidence in their ability to freely obtain reserves from us also drives demand for reserves. It’s possible and consistent with our demand-driven system, that as banks gain greater confidence in using our facilities to monetise collateral, they may judge they need less steady-state precautionary liquidity in the form of reserves.

We continue to analyse these factors and stand ready to adjust facility terms where needed to meet both monetary policy and financial stability objectives, as we learn by doing.^{footnote [3]} Importantly, the framework is designed so that neither the Bank nor firms need to know with precision the exact point at which the PMRR is reached. What matters is that the system is collectively ‘ready to repo’, that is, that firms can and do access liquidity through all our SMF facilities, that is, the STR, ILTR, the Operational Standing Facility (OSF), or Discount Window Facility (DWF), to meet their needs under the terms of the framework. That message remains central: firms must remain ‘ready to repo’.^{footnote [4]}

Recent events illustrate this in action. During the end-January gilt redemption period, we saw that our facilities were used and that this helped to stabilise conditions. This behaviour is consistent with firms ‘learning by doing’ as the environment evolves, in particular, with firms taking a view on their own individual liquidity needs within the context of their view of aggregate liquidity needs. Our market intelligence also suggests that our facilities played a constructive role in helping firms plan for the turn of the year, when we typically see additional volatility due to long-standing balance sheet management issues.

The upcoming period will be characterised by a temporary period of elevated ILTR maturities each week against Level A drawings originally from the October and November 2025 auctions. A thoughtful approach to the aggregate liquidity environment will therefore also be important in April and May: with repo accounting for a quarter of reserves, firms should consider both their own rolling of balances with our facilities, as well as the potential for aggregate changes in liquidity conditions that stem from our repo portfolio.

The observed resilience in money market conditions is clearly supported by the normalisation of our twice-weekly market-wide operations. To add to the resilience of the framework, we have also reviewed our bilateral on-demand facilities.

The Bank is reducing and simplifying the pricing of the Discount Window Facility, moving to a fixed price per collateral set.

Although liquidity is available in unlimited size from the STR (at Bank Rate) and with significant liquidity also available in the ILTR, the opportunities to use the facilities are limited by the auction window being open for 30 minutes twice a week only. That is a deliberate choice: we do not want to disintermediate private markets.

But we do recognise that there can be unexpected liquidity needs intraweek and intraday. This is why the Bank’s bilateral facilities, the OSF and DWF, have important roles in the repo-led, demand-driven framework. They provide on-demand liquidity that can settle at any point during market hours, complementing the use of our market-wide operations which are for routine sterling liquidity management.

In December, we recalibrated the OSF, which is designed as an overnight lending facility against high‑quality (Level A) collateral to be used when firms face payments frictions or there are pressures in money markets, and in doing so also helps to anchor short-term money market rates to Bank Rate. While our market-wide operations remain the routine tools for meeting liquidity needs, firms have responded well to the OSF changes, strengthening their operational readiness and governance around its potential use. We have already seen live use of the OSF in 2025 Q4, which is welcome.

Today, we have announced a recalibration of our other bilateral on-demand facility, the DWF, which provides liquidity against broad collateral. As with all SMF facilities, the DWF is open for business for liquidity management.

The DWF provides a facility for borrowing from the Bank against the full spectrum of eligible collateral, and for a longer tenor than overnight (up to 30 days). It is therefore designed to be a useful option for firms that anticipate or experience previously unexpected liquidity needs that arise between the settlement of our twice-weekly market-wide operations. This includes where a firm judges that an on-demand, same-day settlement facility against broad collateral is more appropriate than using our market-wide facilities, for example because the scale of the liquidity need is larger than usual.^{footnote [5]}

Within this broader toolkit, the DWF should be viewed as one of several options available alongside private market funding, internal buffers, and the Bank’s market-wide facilities. There is no prescribed order in which firms should use these sources; the right tool will depend on the timing and nature of the liquidity demand. Our role is to ensure each facility is designed and priced in a way that supports its intended purpose within the system.

Our pre-existing DWF pricing approach does not support its role as effectively as we would like, particularly in ensuring that the facility is economically usable for unexpected liquidity demands. We are therefore recalibrating the price for two main reasons.

First, moving to a simpler, fixed structure – and away from the current variable price, which varies with the size of the drawing – makes the DWF easier for firms to plan around and incorporate into their liquidity frameworks. This also reflects the PRA’s explicit recognition of the role that central bank facilities – and on-demand bilateral facilities – can play in supporting firms’ liquidity management in their recent consultation.

Second, our market intelligence and comparison with private market alternatives indicate that previous DWF prices were too high for the facility to play a practical role in liquidity management. Adjusting the spread is therefore needed to make the DWF a realistic option and economically useable, while promoting coherence with the broader set of SMF facilities. Narrowing the pricing gap between bilateral facilities and market-wide operations reduces the risk that cost becomes an undue disincentive for appropriate use of the DWF, while not undermining the incentives for prudent day-to-day liquidity management by firms themselves.

The new DWF rates are therefore set deliberately above where we expect ILTR auctions to clear in steady state and above comparable private market pricing (Table A). This keeps the DWF appropriately expensive in normal conditions to avoid disintermediation, yet clearly usable when firms anticipate or experience previously unexpected liquidity needs. The spread will continue to reflect the level of liquidity upgrade provided, with Level A priced below Level B, and Level B below Level C.

We recognise concerns from market participants that the DWF may still carry an element of perceived stigma. Yet, the DWF is part of the regular SMF, and – as with our market-wide facilities – there is a presumption of access for firms that meets the PRA’s threshold conditions and have sufficient collateral. Put differently, the DWF is not a facility for failing firms – the Bank would only lend if it assesses that the firm has the capacity to repay. Rather, the main risk is the perception of stigma deterring timely and appropriate use by firms. We encourage firms to discuss their use of the facility with us at an early stage so that we can facilitate timely access.

Taken together, the changes announced today are aimed towards ensuring that the DWF can play an effective role as part of the evolving SMF. The move to lower, fixed pricing responds to our market intelligence, and strengthens coherence across the framework, while maintaining the right incentives for prudent day-to-day liquidity management by firms themselves.

The PRA consultation paper (CP) sets out explicitly that firms should consider central bank facilities as part of liquidity management.

The PRA is consulting on targeted and proportionate proposed adjustments to modernise the prudential liquidity framework, ensuring firms’ resilience to future liquidity shocks and strengthening firms’ operational readiness across a wider range of scenarios. These changes are built around the recognition that liquidity risk management in a modern world increasingly depends on the ability to monetise assets reliably, whether through private markets or central bank facilities.

The PRA’s Consultation Paper (CP) recognises that frictions may arise in private markets - due to market depth, counterparty availability, or stress conditions, and that operational obstacles can hamper timely usage of central bank facilities if firms are not fully prepared. Clear governance and operational readiness including pre-positioning and live testing form an essential part of credible monetisation plans and regular engagement with the repo-led, demand-driven framework.

The result is the new language in the PRA’s CP on modernising the liquidity policy framework and associated supervisory statement,^{footnote [6]} which sets out clear expectations around the role of the SMF in firms’ liquidity risk management. The PRA’s message is clear: central bank facilities are available, open for business, and can be considered part of firms’ monetisation strategies, subject to their published terms – in other words, firms should plan to use the different facilities according to their different terms. The PRA CP package explicitly acknowledges that central bank facilities – including the Bank’s market‑wide operations and bilateral facilities such as the OSF and DWF – should be considered as part of firms’ liquidity tool kits. Our changes to the DWF are made in co-ordination with that message.

Through the Bank’s discussion paper on the transition to a repo-led, demand-driven framework and our regular market engagement, firms highlighted to us several areas where supervisory expectations did not fully align with the repo-led framework. We took this feedback on board, working closely across the Bank and the PRA to address these perceived inconsistencies. One example was the exclusion of central bank facilities from monetisation channels in PRA110 (Granular LCR) data submissions, which may have been perceived as sending an inconsistent message. This has now been addressed in the consultation package.

Taken together, and alongside the latest update to DWF pricing, these changes align prudential expectations with the SMF. They recognise the full range of tools available to firms, reinforce the importance of operational readiness, and support a system in which firms can monetise assets swiftly and confidently, consistent with the Bank’s transition to a repo‑led approach and its broader objectives for monetary and financial stability.

Resilience is underpinned by prepositioning and operational readiness.

Such a vision of liquidity management and resilience puts emphasis on firms’ ability to demonstrate robust liquidity management and effective monetisation of collateral in private markets as well as at central banks. A central pillar of liquidity resilience within the repo‑led framework is the ability of firms to pre‑position collateral efficiently and at scale, which can then in turn be monetised quickly in one of the market-wide facilities like ILTR, or one of the on-demand facilities, including the DWF that we have recalibrated today.

Firms have already prepositioned over £450 billion of collateral for further drawings, and this stock has become increasingly important as the framework continues to evolve. The stock of pre-positioned collateral has grown in spite of increased facility usage, as collateral has become available after the unwind of TFSME, and as we have seen more firms preposition further collateral – this is welcome and we encourage firms to continue to do so. Indeed, we expect pre-positioned collateral with us to increase further.

The Bank has listened carefully to the feedback provided through our recent discussion paper, and we have taken several steps to improve and streamline our eligibility processes. We are conscious it places clear responsibilities on the Bank, and the need to ensure that our own processes remain proportionate, predictable, and responsive, while also retaining robust risk management.

As a result, we have refined our approach to external due diligence for raw loan collateral, with the aim of maintaining robust assurance while reducing the frequency of full due‑diligence reviews for counterparties that consistently meet our standards. We have also simplified our approach to assessing eligibility of standardised UK residential mortgage-backed security and regulated covered bonds, shortening turnaround times for those asset classes – and will soon launch an improved system for requesting eligibility of structured finance assets. While more complex or less familiar asset types may still take longer to assess – reflecting the need to ensure we can manage them effectively and efficiently – we are continuing to make improvements across these areas as well.

The Bank has also been working with participants to encourage straight-through-processing of security collateral instructions using the Bank’s Collateral Management Portal (CMP) or SWIFT. This helps to speed up collateral delivery, and additional features can be used to support use of Bank facilities – including exposure and collateral reporting. Use of the CMP will help to reduce the manual burden of collateral instructions via spreadsheets. 

Operational readiness is about more than pre-positioned collateral. It also depends on firms’ ability to transact smoothly with the Bank, including in periods of uncertainty. It is therefore encouraging that more firms are actively testing our facilities, particularly the OSF following our recent changes.

As with collateral processes, we are conscious that operational readiness places clear responsibilities on the Bank as well as firms. This is one reason why we are building a new operational platform for our sterling market operations – the Sterling Markets Auction and Repo Trading System (SMARTS). This new system will modernise how firms interact with the Bank, improve end-to-end processes, and provide greater flexibility across the full suite of SMF facilities. SMARTS is designed to reduce manual steps, eliminate paper-based processes, and offer a more intuitive and resilient process for transacting with the Bank, including during periods of stress.

Implementation is already underway. Earlier this year, SMARTS was launched for a small group of firms using the Alternative Liquidity Facility, and initial feedback has been positive, highlighting smoother workflows and a more modern interface. The next phase will extend SMARTS to the Bank’s bilateral facilities – the OSF and the DWF – with go-live planned for 2027. This will allow firms to enter trades directly into the system, removing the need for authorised signatories and manual forms, reducing operational risk, and simplifying the process for on-demand liquidity access.

Alongside the introduction of SMARTS for the DWF, we will remove the separate DWF collateral pool so that all SMF operations are collateralised in the same way. The standalone pool adds an operational step that is no longer necessary. Removing it will simplify processes for firms, eliminate duplication, and support faster mobilisation of collateral across both bilateral and market‑wide facilities, complementing the DWF updates described earlier.

Engagement with SMF participants will increase in the second half of the year. We will provide more information on SMARTS throughout 2026, including testing plans, onboarding, and broader guidance on operational readiness.

Subsequent phases of the modernisation programme will extend SMARTS to the Bank’s auction facilities. Over time, SMARTS will replace the current Btender bidding system entirely, addressing some of the operational frictions and technical constraints highlighted in response to the discussion paper on the repo-led, demand-driven framework. Our aim is towards a single, flexible, modern system to support firms’ interaction with the Bank’s liquidity facilities in the evolving reserves environment.