The Bank regularly reviews its published framework for market operations conducted in support of monetary and financial stability. This includes operations conducted to implement the Monetary Policy Committee’s (MPC’s) policy decisions by transmitting Bank Rate and purchasing assets; and those that exist to safeguard financial stability by offering various forms of liquidity to the financial system. A list of the operations that are considered by this review can be found in the Bank’s Market Operations Guide. In the main, the Bank’s market operations are undertaken in sterling, but facilities also exist in a range of foreign currencies. Operations are also conducted both across the Bank’s own balance sheet and via subsidiaries.
In 2018, the Bank adopted a new model for this review, in response to recommendations from the Bank’s Independent Evaluation Office (IEO) in their evaluation of the Bank’s provision of liquidity insurance. The Bank now aims to publish a short, factual report each year, covering key developments in facilities and their usage. In addition, every three years the Bank aims to also publish a more in-depth evaluation of its market operations, allowing for a stocktake of policy developments over a broader time period.
This is the first such three-yearly report, and serves also to replace the review that was scheduled to be published in 2020 but that was deferred due to the Covid-19 (Covid) crisis. Except where otherwise stated, it therefore provides a factual update on the Bank’s official market operations over 1 March 2019 to 28 February 2021 (the end of the Bank’s financial year). However, it also details some of the important policy developments and debates over the past three years, and in particular reflects on the Bank’s response to Covid.
The economic shock caused by Covid was by far the biggest test of central bank liquidity toolkits since the global financial crisis (GFC) of 2008–09. In common with central banks globally, the Bank deployed its market operations at unprecedented scale and pace over the review period. The size of the Bank’s balance sheet has grown significantly over that time, particularly after March 2020. Most of this activity also took place in unique operational circumstances, with staff and systems operating almost wholly remotely from the Bank’s head office.
Throughout this period, the Bank has taken stock of its actions, identifying where the framework has worked well, and where future reflection might be needed.
Overall, the Bank’s response is judged to have been effective in channelling liquidity to the banking system and in calming significant market dysfunction. Existing and new tools allowed the Bank to act at scale, working quickly and effectively, and in close co-ordination with other central banks.
Weekly Indexed Long-Term Repo (ILTR) operations were heavily used by participants as the crisis unfolded. To buttress that flow of liquidity the Contingent Term Repo Facility (CTRF) was activated in March 2020. Operations backed by the standing dollar swap lines were offered at longer maturity, higher frequency and tighter pricing, supporting financial stability and offsetting the rapid deterioration in dollar funding conditions. In addition, the Liquidity Facility in Euros (LiFE) continued to offer to lend euros on a weekly basis.
In response to MPC policy decisions asset purchase operations were dramatically scaled up, with the Bank’s holdings of gilts increasing by 91% since the beginning of March 2020 and holdings of corporate bonds doubling.footnote  Asset purchases were especially effective in calming core markets, in part due to the unprecedented pace at which the Bank operated.
Despite this success, the Bank acknowledges the important ongoing debates around its use of asset purchase operations. This was discussed in an IEO review published in January 2021. The IEO review suggested that the Bank should ensure that the governance and implementation of quantitative easing (QE) remain fit for the future, and that the Bank should work to develop both its own and the general public’s understanding of QE as a tool. The Bank welcomed the IEO review and published its response alongside it, committing to implementing the IEO’s suggestions in full. Subsequently, in July 2021, the House of Lords Economic Affairs Committee (EAC) published an inquiry into the Bank’s use of quantitative easing. The Bank contributed to that inquiry with written evidence and Governors’ testimony. The Bank’s response was published in September 2021.
In addition, the MPC has set out a framework in August 2021 for guiding the tightening of monetary policy through a combination of higher Bank Rate and balance sheet unwind, as and when it judges it appropriate to do so. That framework has two important operational implications. First, the Bank’s balance sheet is likely to remain materially larger than it was before the GFC, reflecting a substantial increase in the demand for reserves. Work to determine the potential size of this ‘steady-state’ balance sheet, and ensure monetary policy can continue to be implemented effectively as this level is approached, will be an important priority as QE exit proceeds.footnote  Second, to the extent that central banks may be required to operate closer to the ‘effective lower bound’ (ELB) for interest rates than they have been in the past, the Bank will need to be ready to deploy a range of potential monetary policy tools, including Bank Rate and asset purchases, as judged appropriate by the MPC. As part of that preparation, the Bank has recently confirmed that internal technical preparations are in place to implement a negative Bank Rate, with or without tiered reserves account remuneration, if warranted.
Alongside existing tools, the Bank also created new facilities to combat the economic effects of Covid. One example is the Covid Corporate Financing Facility (CCFF), which was launched in March 2020 and aimed to alleviate pressures on non-financial large companies’ cash flows created by the economic disruption caused by the pandemic. Over its active lifetime, this facility lent over £37 billion to 107 different companies, which together employed almost 2.5 million people in the UK. A new Term Funding Scheme with additional incentives for small and medium-sized enterprises (TFSME) was also announced in March 2020. To date, it has provided £91 billion in loans to banks in order to support the pass through of the decrease in Bank Rate, and incentivise banks to provide credit to households and businesses, particularly small and medium-sized enterprises.footnote 
At the same time, there is recognition that the ‘dash for cash’ caused by the Covid crisis exposed a number of underlying vulnerabilities in the global financial system, particularly relating to the role of non-bank financial intermediaries (NBFIs). While pandemics of the scale seen in the past 18 months are not expected to recur regularly, there is a recognition across jurisdictions that the growing role of NBFIs requires reform both to the relevant regulatory frameworks, and to public sector backstops. The Bank is playing a leading role on both priorities.footnote  While there may be a need for new and targeted central bank tools to tackle core market dysfunction in response to how markets are changing, central bank interventions cannot be a substitute for reforms that mitigate the vulnerabilities in financial markets giving rise to liquidity stresses in the first place.
Finally, growing recognition of the scale of the challenge posed by climate change led to a change in the remit of the MPC in 2021. In response, the Bank issued a Consultation Paper in May 2021 on ‘Options for greening the Bank of England’s Corporate Bond Purchase Scheme’, and aims to implement a set of changes in 2021 Q4.
The structure of this report is as follows:
- Section 1 explains the structure and objectives of the Bank’s market operations;
- Section 2 summarises Sterling Monetary Framework (SMF) membership growth over the review period;
- Section 3 outlines the Bank’s Covid response over 2020;
- Section 4 describes the Bank’s monetary policy operations and the key policy debates and developments in this area;
- Section 5 outlines usage of the Bank’s liquidity insurance facilities over the review period, and key developments to these operations;
- Section 6 summarises ongoing work to review the Bank’s policy toolkit in response to new challenges, this includes evolving market structures, the operational implications of the ELB, climate risks and the development of digital money;
- Section 7 outlines developments in the Bank’s communication with participants, market contacts and the general public; and
- Section 8 discusses the Bank’s risk management framework and developments in this area over the past three years, including climate-related risks;
1: Background to the Bank’s market operations
The Bank conducts a range of market operations, either on the Bank’s own balance sheet or through subsidiaries of the Bank. The SMF is the Bank’s framework for operating in sterling money markets and encompasses tools to implement monetary policy – such as reserves accounts and Operational Standing Facilities (OSFs) – plus a number of liquidity support operations. Banks, building societies, designated investment firms (‘broker-dealers’), central counterparties (CCPs) and International Central Securities Depositories (ICSDs) are eligible to participate in the SMF and hold a reserves account.
Activities undertaken through subsidiaries include asset purchases, via the Bank of England Asset Purchase Facility Fund Ltd (BEAPFF); the CCFF (via CCFF Ltd); and – once it commences – the Bank’s Alternative Liquidity Facility, via Bank of England Alternative Liquidity Facility Ltd (BEALF). This is a new deposit facility allowing firms with formal restrictions on engaging in interest-based activity to hold a reserves-like asset in a non-interest bearing way. This is discussed in more detail in Box A.
Separate subsidiary balance sheets are typically used where the Bank benefits from an indemnity from HM Treasury (HMT) (as in the case of asset purchases or the CCFF); or where activity needs to be segregated for other reasons (such as the Alternative Liquidity Facility (ALF), which is held separate to interest-bearing parts of the Bank’s operations).
The following section discusses the Bank’s monetary and financial stability objectives, and how these are supported by the full range of market operations.
1.1: Objectives of the Bank’s operations
The Bank’s mission is to promote the good of the people of the United Kingdom by maintaining monetary and financial stability. Its balance sheet plays a central role in supporting these objectives. Central bank money, whether in the form of banknotes or central bank ‘reserves’ (deposits held with the Bank by financial institutions), provides the ultimate means of settlement for all sterling payments in the economy.
Further detail on the Bank’s objectives and operations are outlined in the Bank’s Market Operations Guide.
1.1.1: Monetary stability
The Bank’s monetary policy objective is to maintain price stability in the UK. The Bank, via the MPC, therefore sets monetary policy to achieve the Government’s target of keeping inflation at 2%.
Subject to that, the Bank supports the Government’s economic policy, including its objectives on growth, employment and the transition towards a net-zero carbon economy.
To maintain monetary stability, the Bank needs to influence monetary conditions. This includes, for example, the level of prices of goods and services, and the availability of credit. The MPC currently does this in two main ways. First, it sets Bank Rate, which is the interest rate that the Bank applies to commercial banks that hold balances in reserves accounts. It influences the rates those banks then charge people to borrow money or pay on their savings. The process and rationale behind applying interest at Bank Rate on the reserves balances held at the Bank by SMF participants is described in Section 4.
Second, the Bank uses asset purchases, also known as QE, in order to provide monetary stimulus and help the MPC to meet its inflation target. This is described in Section 4.
The Bank also takes steps to ensure changes in Bank Rate are passed through to households and businesses. In the recent past the Bank has used term funding schemes as a mechanism to help pass through reductions in Bank Rate. Such schemes are explained in more detail in Section 4.
1.1.2: Financial stability
The Bank works to maintain financial stability by protecting and enhancing the resilience of the financial system as a whole.
To this end, in addition to its policy, supervisory and resolution activities, the Bank stands ready to use its balance sheet to provide liquidity support.
In normal times, firms typically rely on private markets to ensure that liquidity is distributed appropriately across the system, finding its way to those that need it. But those markets may not always be sufficient or work smoothly, particularly during periods of market volatility or dysfunction. And the cost of self-insuring against liquidity risks, which are very low probability but high impact (‘tail’ risks), can be prohibitively high.
The Bank’s standing facilities mean eligible firms know that, as long as they meet threshold conditions and have the right type and amount of collateral, they will have access to reliable sources of liquidity, at a predictable price, both on a day-to-day basis and when they experience or anticipate an interruption to private markets. These facilities are described in Section 5.
2: SMF membership
Compared with many central banks, access to the Bank’s operations is open to a relatively wide set of eligible financial firms (Table A).footnote  The eligibility criteria apply by type of firm. Some of the facilities described below formally sit outside of the SMF (eg non-sterling facilities), but access is typically granted on the basis of a firm being an SMF member.
The Bank assesses whether a particular group of firms should be eligible to participate based on a number of key considerations. These include:
- Their critical importance to the financial system.
- The extent of overnight liquidity risk they run in the course of their business.
- Whether they are subject to appropriate regulatory scrutiny.
Table A: Which types of firms can participate in the Bank’s operations?
Bank Asset Purchase Facility (APF) asset purchases
Operational Standing Facilities
Discount Window Facility
Indexed Long-Term Repo
Contingent Term Repo (if activated)
International Central Securities Depositories
- Source: Bank of England.
SMF membership increased from 209 to 218 participants between 1 March 2019 and 28 February 2021 (Chart 1). Nineteen existing participants signed up for additional facilities, effectively broadening the range of facilities they can use. Interest in joining the SMF continues to come from a range of firms, including newly authorised banks, existing UK banks and those headquartered outside of the UK, though the rate of new applications has slowed in recent years as more and more eligible firms sign up.
The Bank continues to keep its SMF access policy under review, having previously extended access to broker dealers and CCPs in 2014. In a Market Notice published on 25 June 2021, the Bank announced that it had widened access to the SMF to accept ICSDs as eligible institutions. Widening access to ICSDs recognises their important role in the financial system as the custodians and settlers of securities transactions.
Chart 1: SMF membership
- Source: Bank of England.
3: Covid-19 response
2020 was marked by the outbreak of Covid and subsequent pre-lockdown ‘dash for cash’, in which non-bank investors sold off even safe assets such as long-term government bonds to obtain cash. footnote ,footnote  This was the biggest test of core market functioning and resilience since the GFC. Working closely with other central banks globally, the Bank deployed its market operations at unprecedented scale and pace to avert financial market dysfunction and steer the economy through the impact of the pandemic.
The following section outlines the Bank’s response to the Covid crisis over 2020 and into 2021. It describes how the Bank’s balance sheet increased as it deployed its full range of tools to tackle the dysfunction in the market; and summarises some of the operational challenges faced by the Bank during the pandemic.
Figure 1 briefly outlines the main policy developments in the Bank’s response to Covid.
Figure 1: The Bank’s response to Covid-19 in 2020
- Source: Bank of England.
As a result of the actions illustrated above, the Bank’s balance sheet grew significantly over the review period (Charts 2 and 3). Most of this increase took place since the beginning of March 2020, as the Bank acted to minimise the impact to the financial system from the economic shocks caused by Covid.
The growth in the Bank’s assets was mostly through an increase in reserves, which were created predominantly to back the expansion in the Bank’s asset purchase programme and new TFSME.
Chart 2: Liabilities on the Bank of England balance sheet (a)
- Source: Bank of England.
- (a) Chart is a stylised and partial view of the Bank’s consolidated balance sheet and may not precisely balance as a result. The Bank’s full consolidated balance sheet is published with a five-quarter lag. Assets and liabilities from both the Bank’s Issue Department and Banking Department have been consolidated into a single chart. See the Bank of England ‘Bank return’ data for more detail. QE purchases are reflected on the Bank’s balance sheet as an asset in form of a loan to the APF. This chart shows a breakdown of the loan by instrument type. The Term Funding Scheme (TFS) was transferred from the APF to the Bank’s own balance sheet in January 2019. The Special Liquidity Scheme and Funding for Lending Schemes (FLS) were funded through asset swaps rather than reserves, so were not on balance sheet. They are nevertheless shown for context.
Chart 3: Assets on the Bank of England balance sheet (a)
To deliver this expansion in the balance sheet, by May 2020 the Bank was conducting around nine times the number of monthly market operations as in the pre-Covid period (Chart 4). A key part of this total was asset purchase operations, where the Bank initially bought gilts at £13.5 billion per week, before slowing to £4.4 billion later in 2020. This represented a pace of between 1.2 and 3.6 times the pre-2020 average. In addition to gilt purchases the bank operated CTRF and US dollar repo operations, alongside new facilities such as the CCFF and TFSME.
Chart 4: Number of market operations per month
- Source: Bank of England.
In providing these operations at such a scale and frequency, the Bank faced several operational challenges. In March 2020, when the majority of the Bank’s new operations were being created, almost all Bank staff moved to work from home.
This introduced risks around new technology and ways of working that coincided with one of the busiest periods in the Bank’s history. The Bank did see an increase in operational issues during the first few weeks of this period.footnote  But staff and operational processes adapted very quickly and the level of operational issues returned to more usual levels quickly.
The following sections describe in more detail the Bank’s activity in key areas over the review period, including its monetary policy operations and liquidity insurance facilities. The report also discusses some of the important policy debates and developments over the past three years. This includes considerations of the MPC’s toolkit, as well as lessons learned from the Covid crisis. In addition, detail is provided on the Bank’s climate work and new forms of digital payments.
4: Monetary policy operations
This section describes the Bank’s monetary policy operations over the review period. This includes implementation of the MPC’s interest rate decisions by changing the rate charged on reserves balances and term funding schemes, as well as via the Bank’s asset purchase operations. In each of these areas a factual update is provided, detailing objectives and usage of the operations, plus a brief evaluation of effectiveness.
4.1: Reserves accounts
Reserves accounts are effectively sterling current accounts for SMF participants. For most participants, reserves balances can be varied freely to meet day-to-day liquidity needs, and can also be used by SMF members for settlement of obligations arising from their direct participation in UK payment systems.
The Bank implements the MPC's interest rate decisions by applying Bank Rate to reserves balances. This keeps short-term market interest rates in line with Bank Rate. The Bank currently remunerates reserves balances in full at Bank Rate for banks, building societies and broker-dealers. CCPs and ICSDs are required to maintain a target daily average balance in order to receive Bank Rate.
Bank Rate began the review period at 0.75%, having risen to that level from a previous low of 0.25% set in 2016. In March 2020, the MPC announced two decreases to Bank Rate in response to the economic disruption caused by Covid. At a special meeting held on 10 March, the MPC voted to reduce Bank Rate from 0.75% to 0.25%, and Bank Rate decreased further to 0.10% on 19 March 2020, the lowest level in its history.
In August 2021 the Bank confirmed that technical preparations internally and by PRA-regulated firms had progressed sufficiently so that a negative Bank Rate could now be implemented. Further detail is provided in Section 6 of the report.
4.2: Asset purchase operations
The Bank purchases gilts and corporate bonds to implement monetary policy as set by the MPC. These purchase operations are conducted through the APF, which is housed in a subsidiary of the Bank.
The following section describes the Bank’s gilt and corporate bond purchases over 2019–21.
4.2.1: Gilt purchases
The purpose of UK government bond purchases, financed by central bank reserves, is to provide monetary stimulus, helping the MPC to meet the inflation target. Gilt purchases intend to lower longer-term interest rates and, in turn, encourage spending on goods and services, boost economic activity and employment and put upward pressure on prices.
Figure 2 outlines the phases of the Bank’s asset purchase programme from 2009 to 2021. On 1 March 2019, the stock of purchases of UK government bonds was at the MPC’s then target of £435 billion. The Bank periodically reinvests the cash flows associated with a reduction in the stock of gilts (for example through a gilt maturity) back into eligible assets, as required to meet the target stock of purchases. Six reinvestment rounds were undertaken over the period.
Figure 2: Bank of England asset purchase programmes and selected policy interventions since 2009 (a)
- Source: Bank of England.
- (a) Monetary policy and credit easing policies since 2009. For more information about Bank Rate decisions and Forward Guidance, please see respective MPC minutes. Further information about other schemes can be found here: APF Purchases of Commercial and Corporate Bonds, FLS, TFS and TFSME.
In response to the Covid crisis, the MPC announced three further tranches of asset purchases in March, June and November 2020 (‘QE5’). At the end of the review period the total target stock of asset purchases was £895 billion, with purchases expected to reach this target in 2021 Q4.
The Bank conducts gilt purchases evenly across the gilt curve by holding an equal number and size of reverse auctions across short (3 to 7 years), medium (7 to 20 years) and long (20 years and longer) maturity sectors.footnote  These gilt purchase operations received strong levels of participation over the period, including throughout QE5. Chart 5 shows the aggregate size of offers received, expressed as a multiple of the amount the Bank offered to buy (the ‘cover’).
Chart 5: Average weekly cover in QE5 gilt purchase operations
- Source: Bank of England.
The asset purchases announced by the MPC on 19 March 2020 were conducted at a faster pace than previous investment rounds, with purchases of around £13.5 billion per week. This decision was consistent with the observation that during times of market dysfunction, the pace of purchases may provide an important additional effect of QE transmission. This ensured that the Bank was a sizeable active buyer during the height of the ‘dash for cash’ seen in financial markets.footnote 
Operations held after 23 June 2020 reverted towards a slower purchase schedule, with around £6.9 billion of purchases each week (Chart 6). Market functioning had materially improved by this point, such that the positive effects of a rapid purchase pace had likely subsided. In August 2020, the pace of asset purchases was reduced further to around £4.4 billion per week.
Chart 6: Pace of weekly QE purchases
- Source: Bank of England.
The impact of the asset purchase programme was decisive. The programme successfully met its twin objectives – to provide stimulus to the economy by lowering longer-term interest rates, and to counteract any tightening of monetary and financial conditions that might result from the deterioration in gilt market conditions.
Orderly functioning was quickly restored to the market.footnote  Gilt yields and bid-offer spreads fell back sharply as confidence returned, and market functioning measures began to normalise. Purchase operations to achieve the MPC’s target stock of assets continue to take place smoothly, with good participation and tight pricing.
The Bank recognises the importance of continuously assessing and reviewing its policy approach, and learning from both its own experience and that of its peers. One such review of the asset purchase programme was conducted by the Bank’s IEO, who published their findings in January 2021. The findings are discussed in more detail in Section 4.3.
The Bank has recently outlined a framework for guiding the tightening of monetary policy, through a combination of higher Bank Rate and balance sheet unwind, as and when the MPC judges it appropriate to do so. This is set out in greater detail in Section 6 of the report, but is intended to commence through the cessation of reinvestments of maturing gilts not before Bank Rate reaches 0.5% and only if appropriate given the economic circumstances. Thereafter active sales of gilts would be considered not before Bank Rate rose to 1%, again dependent on the economic situation.
4.2.2: Corporate bond purchases
The Corporate Bond Purchase Scheme (CBPS) was launched in 2016 and involves the purchase of sterling non-financial investment-grade corporate bonds issued by companies which make a material contribution to economic activity in the UK. Corporate bond purchases have a similar impact to gilt purchases, but may also reduce liquidity premia in sterling corporate bond markets, and stimulate issuance and hence corporate borrowing. The initial target size of the CBPS was £10 billion, which was reached in May 2017.
Historically, a key aspect to the CBPS has been to minimise the impact on relative borrowing costs across sectors. This approach has been implemented by purchasing bonds in line with a target sector key which is published on the Bank’s website. The sector key shows the proportion of total outstanding eligible issuance accounted for by each sector in the UK economy. Purchases were targeted to match those proportions by sector.
At the start of the review period, the stock of corporate bonds was £9.6 billion, the balance having fallen mainly as bonds held by the CBPS matured. On 1 August 2019, the detail of the first CBPS reinvestment programme was announced, whereby the Bank reinvested the cash flows associated with reductions in the stock of corporate bonds. This reinvestment round began on 11 September 2019 and ran for several weeks, with over £550 million of corporate bonds purchased, returning the CBPS stock to the MPC’s £10 billion target. Consistent with the principle of market neutrality, the reinvestment programme aimed to return the CBPS towards a balanced portfolio by purchasing bonds in those sectors that were underweight relative to the updated sector shares.footnote ,footnote 
On 19 March 2020 the MPC announced a £200 billion increase in asset purchases. Within this amount, the Bank announced via a Market Notice on 2 April 2020 that it would purchase at least an additional £10 billion of corporate bonds (‘CBPS 2’), taking the total target stock of corporate bonds up to £20 billion. The design of CBPS 2 was consistent with the first CBPS (‘CBPS 1’), but with the intention to purchase bonds at a quicker pace. To achieve this, operational changes were made including a doubling of the maximum purchase size for a single bond from £10 million to £20 million in any single auction.
The purchases were completed in October 2020. For both the CBPS 1 and CBPS 2, the Bank delivered a purchase profile in which the majority of target sectors, despite their markedly differing sizes, were within one percentage point of their target sector key. The stock of outstanding corporate bonds as of 28 February 2021 was just under £20 billion.
The launch of CBPS 2 came at the same time as a range of other central bank interventions, so its specific impact on markets is hard to isolate. However, between the end of March 2020 and the end of the purchase programme, investment-grade non-financial spreads fell from a peak of 250 basis points to under 150 basis points. Market intelligence gathered by the Bank suggests that the programme had a material impact on markets and helped to calm conditions.
In March 2021, the MPC’s remit was updated, requiring the Committee to consider how, subject to achieving the inflation target, they might support the transition of the UK economy to net-zero emissions by 2050.footnote  In response, the Bank announced that it would look to adjust its CBPS to account for the climate impact of the issuers of the bonds held, with a view to implementing that approach in 2021 Q4. On 21 May 2021, the Bank published a Discussion Paper ‘Options for greening the Bank of England’s Corporate Bond Purchase Scheme’. This is covered in more detail in Section 6.
4.3: Evaluation of the Bank’s asset purchase operations
The following section provides a brief evaluation of the Bank’s asset purchase operations. This references two important reviews of the programme – the IEO’s review into QE, published in January 2021, and the House of Lords’ inquiry of July 2021.
4.3.1: IEO review into QE
The IEO’s evaluation of the Bank’s approach to QE, provides a broader and more detailed review of activity since the launch of QE in 2009. It focuses on the Bank’s understanding of the QE transmission mechanism and its potential spillovers, the Bank’s approach to designing and operationalising QE, the associated governance and risk management framework, and the Bank’s QE communications.
The report found a wide range of positive evidence on the Bank’s QE programme. This included improvements in its understanding of QE over the past decade, its ability to develop its QE design choices in response to new shocks and strengthened governance frameworks associated with the programme.
However, in light of the rapidly expanding role of QE and new challenges that brings, the report also made several recommendations to the Bank. This included continuing to advance its understanding of QE, both within the Bank and across the general public. In addition, the report recommended that the Bank ensure that QE governance arrangements are clear and well understood, so that the governance and implementation of QE remain fit for the future.
The Bank welcomed this report and published its response alongside it. This sets out the actions proposed by the Bank to tackle each of the IEO’s recommendations. Among other things, this includes producing a prioritised work plan for future investment in analysis to fill QE knowledge gaps, considering further investment to improve its operational and risk management infrastructure around the programme and developing more accessible communications.
4.3.2: House of Lords Economic Affairs Committee Report
In July 2021 the House of Lords EAC published an inquiry into the Bank’s use of QE. The Bank contributed to that inquiry with written evidence and Governors’ testimony. The Bank published a response to the report in September 2021.
4.4: Funding schemes
The Bank has operated three long-term funding schemes in recent years – the Funding for Lending Scheme (FLS), the Term Funding Scheme (TFS) and the TFSME. The latter was launched during the review period, as part of the Bank’s response to the Covid crisis. Chart 7 shows the usage of these schemes since their respective launches.
4.4.1: FLS and TFS
The FLS was launched in 2012, following the intensification of the crisis in the euro area, which caused bank funding costs to increase. The scheme was designed to incentivise banks and building societies to boost their lending to UK households and private non-financial corporations.
The FLS closed to purchases on 31 January 2018. The total amount of FLS drawings outstanding fell from £16 billion to £0.1 billion during the review period.
The TFS was launched in 2016, following the UK’s vote to leave the European Union (EU). Its primary objective was to reinforce the pass-through of the August 2016 cut in Bank Rate to the interest rates faced by households and businesses.
The scheme provided four-year funding to eligible participants. The drawdown period closed on 28 February 2018, and the total amount of loans outstanding at the end of the drawdown period was £127 billion.
The launch of the TFSME has accelerated the decrease in TFS holdings, as participants have repaid their TFS drawings and borrowed through the TFSME. As of 28 February 2021, there was £39 billion outstanding in the scheme.
The TFSME was announced on 11 March 2020 and was designed to support the pass-through of the decrease in the Bank Rate from 0.75% to 0.25% and incentivise banks to provide credit to businesses and households to bridge through the period of Covid disruption. While similar in design to the TFS, the TFSME was designed to provide additional incentives to banks to lend to small and medium-sized enterprises (SMEs) during the Covid crisis in comparison to the TFS.
The TFSME initially offered cheap four-year loans to eligible participants against eligible collateral. A number of changes to the scheme were announced during 2020. Firstly, the initial borrowing allowance was increased from 5% of participants’ stock of real economy lending to 10% by the MPC on 19 March 2020. Secondly, on 2 May and 24 September 2020 the TFSME was updated to support the UK Government's Bounce Back Loans Scheme (BBLS). This meant that participants could extend their TFSME borrowing by up to six additional years to align with the term of loans made through the BBLS. Finally, on 17 December 2020, the drawdown window and lending reference period were both extended by a further six months. This meant that TFSME participants could use the scheme until 31 October 2021. As of 28 February 2021, there were £75 billion in outstanding drawings. Between the announcement of the scheme in March 2020 and the end of the review period, 70 participants had signed up to access the TFSME.
4.5: Evaluation of the Bank’s funding schemes
In December 2018 the Bank published a Quarterly Bulletin article reviewing the TFS. This reported that the Scheme appeared to have achieved its primary objective with evidence suggesting that the reduction in Bank Rate was passed on to lower lending rates on loans such as mortgages, without significant compression in lenders’ net interest margins or the supply of credit to the economy. This conclusion was based on quantitative and qualitative evidence, including feedback from participants. Bank staff intend to conduct similar analysis on the TFSME once it closes to new drawings.
Box A: Alternative Liquidity Facility
On 28 September 2018, the Bank announced that it would be establishing the Bank of England ALF, a new non-interest based deposit facility. The on-boarding process for eligible applicants began in 2021. The facility is scheduled to launch in 2021 Q4. The 2022 edition of this report will cover the launch of the ALF in more detail.
The ALF allows UK Islamic banks, and any other UK banks with formal restrictions on engaging in interest-based activity, to hold a reserves-like asset in a non-interest based way. This provides these banks with greater flexibility in meeting High Quality Liquid Asset requirements under Basel III capital and liquidity rules.
The new facility is structured as a wakalah, or fund-based, facility. This means that participant deposits will be backed by a fund of assets. The return from those assets, net of hedging and operational costs, will be passed back to depositors in lieu of interest.
Box B: Short-term interest rate control
The Bank monitors both secured and unsecured rates to assess the effectiveness of monetary policy implementation. In particular, the Bank is the administrator for SONIA, the Sterling Overnight Index Average, which is a measure of the rate at which interest is paid on sterling short-term wholesale funds in circumstances where credit, liquidity and other risks are minimal.
Both secured and unsecured rates responded to the decreases in Bank Rate in 2020 (Chart A), although the gap between market and official rates varied somewhat during times of market stress, or over period ends.
In March 2020, at the start of the ‘dash for cash’, market functioning in the overnight segments of the gilt repo market deteriorated. This was driven by some NBFIs (eg Money Market Funds) reducing their cash lending while other NBFIs, including insurance companies, pension funds and liability-driven investment asset managers (collectively known as ICPFs) and hedge funds, increased their demand for cash borrowing from the gilt repo market. Bank analysis suggests that the combined effects resulted in an additional £15 billion net liquidity demand for cash from the gilt repo market.footnote  Such a large and rapid withdrawal of short-term funds by NBFIs is likely to have impacted dealer banks’ ability to on-lend. In addition, dealers had initially expanded their repo balances, partly to meet increased demand for cash from NBFIs. Taken together, the increased demand for cash, combined with dealers’ inability or unwillingness to further expand intermediation capacity, was sufficient to generate significant premiums for repo borrowing and more widespread illiquidity in the market.
Short-term interest rates also typically deviate from Bank Rate around period ends. Many reasons are cited for this behaviour, including constraints on banks’ balance sheets, the consequent cross-currency basis dynamics, and collateral scarcity. Chart A shows a 70 basis points fall in RONIA, a secured overnight benchmark rate, at end-December 2020. The typical widening in cross-currency bases, especially at year-end means that there continues to be demand for collateral in sterling repo even at very low repo rates. Investors or banks holding US dollars can swap into sterling through the cross-currency basis and invest in sterling repo even at ultra-low rates and still earn a premium relative to investing in US dollar repo. Excess liquidity in global money markets continues to depress short-end rates, a theme that has developed since the commencement of QE programmes in spring 2020. Globally, as central bank balance sheets have grown there are a limited number of options for where this additional liquidity can end up; usually it is placed with banks and money market funds. At period ends, the options to invest this excess cash are further limited; simultaneously the collateral scarcity in repo markets heightens, leading to a significant downward pressure on collateralised money market rates.
This dynamic does not exist in the unsecured deposit market, whereby banks simply reduce the amount of deposits they accept on calendar period ends, rather than imposing highly negative rates. Unsecured overnight rates, as indicated by SONIA did not fall anything like as dramatically: it was just over 6 basis points lower than Bank Rate on 31 December, compared with an average of 5 basis points during the rest of the month.
Chart A: Sterling overnight interest rates (a)
- Sources: Bank of England and WMBA Ltd.
- (a) Transactions included within the SONIA calculation are unsecured, of one-day maturity, settled same-day, and greater than or equal to £25 million in value. RONIA (Repurchase Overnight Index Average) is based on brokered sterling overnight transactions where collateral is provided as a security.
5: Liquidity insurance facilities
The Bank’s lending operations under the SMF are designed to provide liquidity support to market participants. They include the OSFs, ILTR operations, CTRF, and Discount Window Facility (DWF). This section also covers several facilities operated outside of the SMF. These are the US dollar repo operations, the LiFE and the CCFF.
This section details each of these operations, outlining usage statistics as well as providing an evaluation of their performance over the review period.
Chart 7 shows the total amount lent by the Bank since January 2011.
5.1: Operational standing facilities
OSFs allow SMF participants to deposit reserves with, or borrow reserves from, the Bank overnight.
Traditionally, the rate paid on the Operational Standing Deposit Facility has been 25 basis points below Bank Rate. However, when Bank Rate decreased from 0.25% to 0.10% on 19 March 2020, the OSF Deposit rate was kept at zero. As all reserves account balances are remunerated at Bank Rate there remains little incentive for most reserves account holders to use this facility. The exceptions are firms still subject to an average reserves target, who make occasional use of the facility to manage their reserves balance.footnote  Reflecting this, there was limited use of the deposit facility over the review period.
The rate charged on the Operational Standing Lending Facility remained at 25 basis points above Bank Rate. Given the large aggregate supply of reserves there is currently little demand from market participants to use this facility. OSF usage is published subject to a lag, on the third Wednesday following the end of the maintenance period, on the Bank of England database.
In September 2020 OSFs were used to help bridge the disruption caused by a CREST outage.footnote  CREST is the UK’s Central Securities Depository, used to settle transactions for UK securities (gilts, equities and money market instruments). It is operated by Euroclear UK & Ireland. The outage was caused by a technical issue, and resulted in CREST members being unable to unwind their intraday positions. It also meant that some firms did not have the liquidity they expected at close of business. The Bank undertook OSFs to convert its intraday exposure into an overnight exposure. Firms with an unexpected cash shortfall or excess could also draw on the OSFs to manage their position. As a result, £42 billion was lent through the OSF in September 2020.
5.2: Indexed Long-Term Repo operations
The Bank’s market-wide ILTR operations provide liquidity for a six-month term, and allow participants to bid for reserves against the full set of eligible collateral, which the Bank has established in three distinct categories:
- Level A: Highly liquid high-quality sovereign securities which are liquid in all but the most extreme circumstances.
- Level B: High-quality liquid collateral, including private sector securities that normally trade in liquid markets.
- Level C: Less liquid securities and portfolios of loans.
When originally launched in January 2014 the ILTR was operated on a monthly basis. The Bank announced on 26 February 2019 that the frequency of ILTR operations would increase from monthly to weekly for a period. This was a precautionary step to mitigate the potential for heightened uncertainty associated with the UK’s exit from the EU. On 1 October 2019 this weekly frequency was extended until further notice, given ongoing uncertainty and feedback from market participants that they welcomed the increased flexibility of ILTR as a tool to assist with balance sheet liquidity management. Therefore, ILTR operations were carried out on a weekly basis throughout the review period.
The stock of borrowing outstanding through ILTR operations averaged £11 billion between 1 March 2019 and 29 February 2020. Usage peaked during March 2020, when £14 billion of new ILTRs were allocated, the stock outstanding rose to an average of £25 billion between 1 March 2020 and 31 August 2020. March 2020 ILTR usage exceeded the previous peaks of in 2016, when additional operations were held around the EU referendum.
Usage of ILTRs subsequently fell back as the Covid crisis abated, leaving the stock outstanding at £4.6 billion on 28 February 2021.
During the review period 60% of ILTR drawings were made against Level A collateral, 6% against Level B and 34% against Level C. Greater use of Level A collateral over 2019–21 contrasts with the trend seen in previous years where Level C collateral was preferred.footnote  The Bank’s judgment is that during the Covid crisis, firms made use of the ILTR in large scale against Level A collateral in order to provide a source of reserves during the ‘dash for cash’ episode as described in Section 3. Previously, ILTR usage had tended to be focused more on Level B and especially Level C collateral as firms sought a liquidity upgrade, although this still occurred in large absolute size during 2020 (Chart 8). The ILTR is intentionally designed to respond to repo and funding market stress events simultaneously across a wide range of collateral.
Since the onset of market instability in March 2020, the Bank has been reflecting on the ‘lessons learned’ from its response to the Covid crisis, and those of central banks more generally. This ongoing review has drawn on usage data, market intelligence gathered from a variety of UK banks and building societies, and analysis.
Participants have commented that the ILTR – which was already being offered weekly – was useful as a precautionary liquidity management tool during the Covid crisis. The six-month term was useful in seeing firms through the stress, yet short enough to be flexible and not substitute for longer-term funding. However, some participants noted that the auction mechanism and allocation/pricing structure is still relatively complex, and the lack of guaranteed liquidity access could have marginally affected the confidence of the market. The Bank has taken this feedback on board as part of its internal ‘lessons learned’ exercise, and – indeed – these considerations formed part of the decision to launch the CTRF in 2020, which is covered in the next section.
Chart 8: ILTR drawings against eligible collateral sets 2019–21
- Source: Bank of England.
5.3: Contingent Term Repo Facility
The CTRF is a liquidity facility that the Bank can activate in response to actual or prospective market-wide stress. It allows participants to borrow central bank reserves in exchange for other, less liquid assets. The Bank reserves the right to activate the facility as it deems appropriate. The specific terms of the facility (eg frequency, maturity and pricing) are defined at each launch, so that the Bank can respond to the scenario in question.
On 24 March 2020 the Bank activated the CTRF in response to frictions observed in global and domestic money markets following the outbreak of Covid. At that time demand for ILTR liquidity had increased sharply, with partial allocation of some auction bids on 17 March and 24 March 2020. Activation of the CTRF enabled banks to access guaranteed liquidity at a known price during the crisis. It also allowed participants to bridge beyond the point at which drawings could be made from the TFSME, which had been announced but was yet to be formally launched.
Weekly three-month term operations ran from 26 March 2020 to 28 May 2020. Weekly one-month term operations ran from 30 March 2020 to 26 June 2020. During this period, £11 billion was allocated in three-month term operations and £130 million was allocated for a term of one month. The final CTRF operation matured on 28 August 2020.
This was the first time the facility had been activated since June 2012, when the CTRF (then named the Extended Collateral Term Repo Facility) was activated in light of turbulent market conditions resulting from the Eurozone crisis. In March 2020, the size of the CTRF operations were unlimited and priced at a fixed rate of Bank Rate plus 15 basis points.
It is likely that the launch of the CTRF following the onset of the Covid crisis helped to calm money market rates, coupled with the Bank’s other actions taken in co-ordination with global peers. In the view of many contacts, the CTRF’s presence was the key backstop preventing repo rates rising too high. Firms noted that the three-month term was particularly helpful in providing certainty about access to funding.
5.4: US dollar repo operations
The Bank’s US dollar repo operation has historically offered to lend dollars on a weekly basis, operating at the same time as operations run by central banks in regions that also make use of the international network of standing swap lines between participating central banks; in this case between the Bank and the US Federal Reserve. Participants can bid for unlimited funds for a seven-day term at fixed spread, secured against Level A, B and C collateral.
In March 2020, in response to the Covid outbreak, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve and the Swiss National Bank took co-ordinated action to enhance the provision of liquidity via the standing US dollar liquidity swap line arrangements.
As part of this response, during the week commencing 16 March 2020, these central banks began offering US dollar repo operations with an 84-day maturity, in addition to the existing seven-day maturity operations. The central banks also agreed to lower the pricing on these operations by 25 basis points. These 84-day term operations ran until 30 June 2021. Weekly seven-day operations continue unchanged.
On 23 March 2020, the Bank, in co-ordination with other central banks, increased the frequency of seven-day maturity US dollar repo operations from weekly to daily. On 1 July 2020 this was reduced to three times per week and on 1 September 2020 the Bank returned to weekly seven-day maturity operations.
Chart 9 shows the amounts allocated in US dollar repo operations since August 2019. As the Covid pandemic spread in March 2020, and the market increased its demand for US dollars, initial higher usage of the Bank’s liquidity facilities was concentrated in this facility. Usage rose to around £15 billion per week once the 84-day operations were launched and pricing lowered, having been close to zero usage for 10 years previously. The amounts allocated in these operations, during a single month, peaked at £43 billion during March 2020. Usage of the facility fell back to pre-Covid levels in June 2020.
Chart 9: US dollar repo operations
- Source: Bank of England.
Several contacts noted that daily US dollar operations were a key reason for US dollar markets calming in the UK and other key jurisdictions (Chart 10). Participants also commented that the lower pricing decreased any residual stigma associated with this facility.
Chart 10: USD funding conditions
- Sources: Bloomberg Finance L.P., ICE Data Indices, LLC and Bank calculations.
5.5: Discount Window Facility
The DWF is a bilateral on-demand facility provided to institutions anticipating or experiencing heightened liquidity needs. It allows participants to borrow gilts for a variable term in return for less liquid collateral in potentially large size. The Bank may lend sterling cash instead of gilts to smaller participants or if, for example, government bond repo markets fail to function properly.
The Bank publishes quarterly data of DWF usage with a five-quarter lag. There was no DWF usage recorded up to the most recent DWF disclosure period (the three months to September 2019). However, the Bank undertakes a regular programme of test trades with DWF participants to ensure operational readiness.
5.6: New operations
Over the review period the Bank launched a number of new facilities to support its monetary and financial stability objectives.
5.6.1: Liquidity Facility in Euros
On 5 March 2019, the Bank announced the new LiFE. This facility allows SMF participants to borrow in euros from the Bank of England. This was a precautionary step to provide additional flexibility in the Bank’s provision of liquidity insurance during the UK’s withdrawal process from the EU. This facility offered to lend euros on a weekly basis until further notice. This was consistent with the Bank’s position as set out in the November 2018 Financial Stability Report, that it stands ready to provide liquidity in all major currencies.
The facility was supported by the activation of a standing swap line between the Bank and the European Central Bank. Like the swap line between the Bank and the Federal Reserve this formed as part of the existing international network of standing swap lines which provide an important tool for central banks in pursuit of financial stability objectives.
LiFE operations offer liquidity in euros for a one-week term. Participants are able to borrow against the full set of eligible collateral. The first LiFE operation was held on 13 March 2019. Over the review period, £70 million was allocated in LiFE auctions representing mainly small test usages of the facility. There were no outstanding LiFE balances by the end of the review period. In light of sustained improvements in funding market conditions, the Bank announced on 29 July 2021 that LiFE operations would cease after October 2021.
5.6.2: Covid Corporate Financing Facility
On 23 March 2020, the Bank and HMT opened the CCFF for drawings. The facility was designed to alleviate pressures on non-financial companies’ cash flows created by the economic disruption caused by the pandemic. It worked by purchasing short-term corporate debt, known as commercial paper (CP), from companies that were of investment grade standing before the Covid disruption which commenced in March 2020 and that made a material contribution to the UK economy. By lending to large companies directly, the CCFF protected the space for banks to lend to the wider population of companies, complementing other Bank schemes such as the TFSME.
The CCFF closed to new purchases on 23 March 2021. Over its lifetime, the CCFF lent over £37 billion to 107 different companies. Issuance peaked at just over £20 billion in May 2020, furthermore the CCFF approved over £85 billion of borrowing limits to over 230 companies. Eligible CCFF companies accounted for just over 2.5 million jobs in the UK.
The scheme closed for new purchases on 23 March 2021, but the CCFF will continue to hold companies’ CP until the final maturities (currently expected to be in March 2022).
Box C: IEO evaluation of the Bank’s approach to providing sterling liquidity
In 2018, the IEO, an independent unit within the Bank that reviews the Bank’s performance, published a report evaluating the approach to providing sterling liquidity (2018 SMF Evaluation). The 2018 SMF Evaluation identified a number of recommendations under the themes of future proofing facilities, working together as ‘One Bank’ and communications, and on risk management. The IEO has reviewed how these recommendations have been implemented by the Bank since 2018, through internal interviews and a survey with relevant Bank staff, as well as reviewing feedback received from participants. The first round of the 2019 Liquidity Biennial Exploratory Scenario – a simulated scenario testing banks’ response to a severe liquidity stress – and the Covid stress also provided case studies.
In July 2021, the IEO reported to the Bank’s Court of Directors that it judged that the recommendations from the 2018 SMF Evaluation had been implemented successfully.
Under the future-proofing theme, the IEO’s findings support the view in this report that the Bank has shown the willingness and ability to react quickly to changing market conditions. This is clearly illustrated by the Bank’s Covid response. In particular, the IEO agrees that the activation of the CTRF and frequency and certainty of ILTR operations were welcomed by participants. However, the IEO is also aware that some participants had not appreciated the options they had in respect of repaying ILTR allocations at maturity versus maintaining drawings to smooth maturity profiles, and encourages the Bank’s ongoing work to improve the understanding and operation of this process in light of its ‘lessons learned’ from Covid exercise.
While the facilities were effective in supporting the resilience among banks during the Covid stress, the facilities were not sufficient to address the scale of stress in the wider financial system and in particular among NBFIs that are outside the SMF. The IEO welcomes the Bank’s work both in the UK and at a global level in exploring the need for new and targeted tools to tackle market dysfunction in response to changing markets and exploring where liquidity will and will not be provided.
On the One Bank theme, the IEO has found that colleagues across the Bank feel that they are working more effectively together and information sharing has strengthened.
On communications, the Bank has improved transparency around its market operations and how they work, including more details on risk management. As this report discusses, the Market Operations Guide is one example of this. The IEO has reviewed overall positive feedback on the accessibility and preferred online format of the guide from market participants. By clarifying how the facilities work and the Bank’s approach to providing liquidity, participants have a clearer understanding of when the facilities can be used, which was demonstrated by the broad usage of the CTRF, ILTR and US dollar repo facilities during the Covid stress. Improved communications have also helped the Bank make progress in reducing the stigma of participating in these SMF facilities. The Bank has also improved its material for participants on the technical details around loan collateral pre-positioning. And the move to streamline the annual review process in most years has been successful, with this report a good example of the more substantive publication.
6: Developing the Bank’s toolkit for the future
Since the GFC, and especially over the past three years, the Bank has had to develop its thinking on the future of its toolkit, in response to a wide variety of new challenges and risks. This has led to many of the developments described in earlier sections of this review (for instance, lending in euros). The most significant areas where work is currently ongoing are summarised below. These are prompted by factors including evolving market structures (specifically the growth in importance NBFIs); the implications of operating Bank Rate nearer to the ELB more persistently than in the past; and the need to consider the impact of climate risks.
6.1: Developing new and targeted tools for tackling market dysfunction
The financial market fallout from Covid tested the improvements made to the Bank’s facilities since the GFC. In general, the facilities worked well and helped to maintain the stability of the UK financial system by supporting the resilience of the banking system. Feedback from contacts suggests that the market particularly valued the Bank’s ability to vary its approach quickly in response to changing market conditions, including through increased size and frequency of operations, and the adjustment in terms. In addition, new tools such as the CCFF and TFSME were deployed at an unprecedented speed to ensure that Bank support reached a broader range of participants.
The Covid crisis did, however, expose some wider vulnerabilities in financial markets, specifically as a result of the growth of NBFIs.footnote  This includes investment funds, hedge funds, pension funds and insurers. Analysis by the Financial Stability Board shows that NBFIs account for around 50% of the global financial sector’s assets, and approximately the same share in the UK.
Central banks have traditionally focused on providing backstop liquidity via the banking system. The Bank, for example, does this via the ILTR and CTRF. While these facilities proved effective in supporting resilience and preventing stress among the banking system, they were insufficient on their own to respond to the type of shock which disrupted gilt markets in March 2020. Asset prices fell sharply and suddenly, volatility increased substantially, and market liquidity dried up as market participants reacted to the impact of the pandemic on economic activity and the uncertainty around the scope and duration of public health measures. Additional central bank intervention via QE asset purchases was launched to help effectively restore monetary and financial stability. Other major central banks took similar action to tackle market dysfunction in core markets.
While it is first and foremost for market participants to manage the liquidity risks they face, it is not realistic or efficient to expect them to self-insure against every conceivable shock. To tackle future market dysfunction effectively, the Bank may need new, targeted tools that respond to how market structures have evolved. This could include formalising the terms on which central banks feel compelled to respond to dysfunction, to set clearer expectations. In considering the design of any tool the Bank will need to ensure the tool is effective in resolving the dysfunction. More generally, central banks will need to ensure the tool acts as a backstop to avoid disintermediating the market; ensure risks to their balance sheet can be managed; and avoid the risk of negative side effects such as incentives to take unacceptable risk. The Bank has been leading international thinking in this area, and will consider its next steps on this topic over the coming period. However, it is important to recognise that central bank interventions cannot be a substitute for reforms that mitigate the vulnerabilities in financial markets giving rise to liquidity stresses in the first place.
6.2: Implications of operating near the effective lower bound
The ELB is the point at which further cuts in the policy rate no longer provide stimulus or even have adverse effects on the economy.footnote  The Bank’s view of where this rate sits has evolved over time. Work in 2018 concluded that the ELB was close to, but a little above zero. However, more recently the Bank has updated the estimate of the ELB in light of current economic conditions and analysis conducted on negative interest rates.
In 2018 the Bank published a Discussion Paper outlining how its balance sheet may evolve in future, and setting out a proposed framework for controlling short-term interest rates during any future unwind of QE. A speech given in 2019 by Andrew Hauser discussed how the balance sheet may change in future if monetary policy was to tighten. The MPC has recently updated this work, and has set out a framework for guiding the tightening of monetary policy through a combination of higher Bank Rate and balance sheet unwind, as and when it judges it appropriate to do so. That framework has two important operational implications.footnote 
First, the Bank’s balance sheet is likely to remain materially larger than it was before the GFC, reflecting a substantial increase in the demand for reserves due to factors including widespread reforms in liquidity regulation. Work to determine the potential size of this ‘steady-state’ balance sheet, and to ensure the Bank has the right tools to ensure monetary policy can continue to be implemented effectively as this level is approached, will be an important priority as asset purchases unwind.footnote  The Bank has said it will stand ready to meet SMF participants’ demand for reserves through regular open market operations (OMOs) – tools that are used to allow participants to bid for reserves against certain collateral, for a certain term. Work to explore the shape of a future programme of OMOs will be particularly important and will need to account for how the evolution of market structures changes the way that reserves move through the system.
Second, to the extent that the Bank may operate closer to the ELB than it has in the past, the Bank may need to be ready to deploy a wider range of potential monetary policy tools in response to shocks. This includes Bank Rate and asset purchases, as judged appropriate by the MPC.
As part of that preparation, the Bank has recently confirmed that internal technical preparations are in place to implement a negative Bank Rate, if warranted. This could include the option of a tiered system of reserves account remuneration, where the Bank would apply more than one interest rate to reserve balances
6.3: Developing the Bank’s tools in response to climate risks
In June 2020, the Bank published its first annual climate disclosure report. It was one of the first central banks to make this step, and the Bank’s work on the report gained recognition through the Green Initiative award from Central Banking. The Bank recently published its second such report in June 2021.
Climate risks have a direct impact on the delivery of the Bank’s core policy objectives and so have driven a range of policy actions to build resilience across the financial system. The importance of this work was recognised by an update to the MPC’s remit in March 2021. The MPC is now required to consider how, subject to achieving the inflation target, they might support the transition of the UK economy to net-zero emissions by 2050. The Bank welcomed the updated publication of the MPC remit.
In response, the Bank intends to adjust the way it manages the CBPS to take account of the climate impact of issuers of the bonds it holds. By ‘greening’ the CBPS the Bank can use its balance sheet to incentivise bond issuers to support transition, and encourage other investors to also exert pressure on companies to act.
Figure 3 sets out the Bank’s proposed approach to greening the CBPS. This is guided by the CBPS’s overarching purpose as a monetary policy tool, and the Bank’s broader obligations as a public body.
Figure 3: Overview of the Bank’s proposed approach to factoring climate into the CBPS
- Source: Bank of England.
Further detail on this proposal is set out in a Discussion Paper ‘Options for greening the Bank of England’s Corporate Bond Purchase Scheme’. This will be operationalised in Q4 2021, with the commencement of the first reinvestment round.
6.4: Future access to the Bank’s balance sheet
The Bank has begun to look at the appropriate level of access to its balance sheet and payments infrastructure, partly in response to the Future of finance report. This is also a result of the ongoing debate around new forms of digital money, both publicly and privately provided.
6.4.1: Call for evidence on access to Bank of England payment infrastructure and balance sheet for payments firms
In November 2019, the Bank published a call for evidence in response to the Future of finance report’s recommendation that the Bank should consider the appropriate level of access to its balance sheet and payments infrastructure, along with a package of suitable safeguards. This provided a framework to engage with relevant stakeholders to explore demand for additional services that the Bank could offer to payments firms, notably access to overnight deposit facilities.
Between November 2019 and January 2020, the Bank received responses from, and met with, a diverse range of stakeholders including banks and non-bank payment service providers, payment system operators and other authorities. The findings of this outreach are summarised in the Bank’s June 2021 Discussion Paper New Forms of Digital Money. While benefits to allowing payments firms to hold customer money directly with the Bank were identified, respondents highlighted a number of risks associated with this. However, these risks must be appropriately mitigated through a strengthening of the Electronic Money and Payment Services Regimes for the Bank to be comfortable with non-bank payment firms holding their clients’ money overnight in an account at the central bank. The Bank will continue to work closely with the Financial Conduct Authority (FCA) and HMT to consider how best to address the issues identified.
6.4.2: New forms of digital money
In June 2021, the Bank published a Discussion Paper, exploring how new forms of digital money, either publicly or privately provided, could impact the Bank’s objectives for monetary and financial stability. The paper notes that new forms of digital money could have implications for the functioning of money markets, the Bank’s future framework for controlling interest rates, and for access to the Bank’s balance sheet. The Bank will continue to work closely with HMT and other regulators on these topics as it furthers its thinking on both private and public forms of digital money – including, for a central bank digital currency (CBDC) through the joint Bank of England and HMT CBDC Taskforce, announced in April 2021.
7: Developing the Bank’s communications
Partly in response to the IEO’s review of how the Bank provides sterling liquidity, the Bank has made several changes to improve its communication with participants. These are designed to better inform users about schemes, and to reduce any stigma surrounding their use.
For all of its facilities, the Bank operates an ‘open for business’ approach. This means that participants which meet regulatory threshold conditions for authorisation, and which have the appropriate type and amount of collateral, have the flexibility to use the facilities as and when they deem appropriate. These firms do not need to justify their decision to use these facilities to the Bank or to the PRA. There is no fixed order in which the Bank expect firms to use one form of liquidity over another.
An important part of the Bank’s ‘open for business’ approach is ensuring that it provides a high level of transparency around the market operations. Over the review period, the Bank made a number of steps to increase this transparency and to aid understanding.
One such improvement was the publication of the Market Operations Guide, launched in October 2019. The guide provides detailed information around how and why the Bank operates in markets, and how various operations work in practice. The accessible webpage replaces the previous guide (known as the ‘Red Book’) with a simplified online approach that is more user-friendly. It also covers a wider set of facilities, such as the asset purchase programme, the term funding schemes, and funding facilities in non-sterling currencies. The PRA’s approach to supervising liquidity and funding risks Supervisory Statement was also updated following the publication of the Market Operations Guide to reflect this approach.
The Bank has already seen some success from this communication strategy. Following the Covid stress in March 2020, there were minimal signs of any stigma in the use of the multilateral liquidity facilities. The ILTR, CTRF and US dollar facilities all had broad usage with minimum concerns expressed by users. Firms in their feedback said that they understood how the facilities worked and how to access them.
This understanding was helped by the Bank’s decision to encourage live testing of its facilities in 2019. In the run-up to the UK’s withdrawal from the EU, the Bank worked with firms to perform a programme of small test trades in its multilateral market operations, to ensure operational readiness in case they needed to be called upon. This was particularly focused on non-sterling liquidity operations and the ILTR facility.
8: Risk management
The following section discusses the Bank’s risk management framework, including significant policy developments in this area over the past three years. In particular, climate-related risks to the Bank’s financial operations are discussed towards the end.
8.1: Risk management framework
There is a presumption of access to the SMF for firms that meet the PRA’s supervisory threshold conditions and which have the requisite collateral. A firm’s SMF eligibility is subject to a regular and independent review of creditworthiness by the Bank’s financial risk management function. The due diligence process includes a regular review of the firm’s business viability and strategy, asset quality, funding and liquidity, and both current and prospective capital position. The resulting firm rating enables the Bank to monitor its risk and exposures by the underlying riskiness of its counterparties across multiple operations. To produce credit assessments, data and information are sourced from PRA supervisory colleagues, publicly available information such as annual reports and news items, and the member firms themselves, including through onsite interviews with the firm’s executive management, where appropriate.
This analysis is reviewed and updated regularly. Provided the firm still meets threshold conditions and is not failing or likely to fail, then there is a presumption that the Bank will lend to that firm. All lending under the SMF is secured against collateral. Collateral haircuts are set to protect the Bank’s balance sheet in a severe stress while avoiding procyclicality – the intention is that haircuts would not need to be increased when lending is required. The Bank in principle accepts as eligible collateral any asset it judges it can effectively and efficiently risk manage. It does this to enable a broad range of counterparties to have access to SMF facilities.
The eligible collateral list is therefore very broad, including a wide range of securities and portfolios of residential mortgage loans, asset finance, consumer, auto, corporate, SME, private finance initiative and social housing loans.footnote  In September 2020, asset finance and term loans under HMT’s Coronavirus Business Interruption Loan Scheme (CBILS) or Coronavirus Large Business Interruption Loan Scheme (CLBILS) and loans under the Bounce Back Loan Scheme (BBLS) were also added to the Bank’s eligible collateral list.
The total amount the Bank could lend through its market operations based on the amount of collateral available stood at £373 billion on 26 February 2021, £51 billion more than on 28 February 2019.
As at the end of February 2021, haircuts for SMF collateral start at 0.5% for sovereign securities, 12% for residential mortgage-backed securities or covered bonds, and 30% for portfolios of senior corporate bonds. Loan pool haircuts across all collateral types currently range between 14%–55% (excluding Libor add-ons). Residential mortgage collateral continues to make up the majority of collateral delivered to the Bank. Chart 11 shows the total size and composition of collateral.
Chart 11: Size and composition of collateral (a)
In 2017 the Bank’s approach to providing liquidity in resolution was published. Ensuring that a firm in resolution continues to have sufficient liquidity to meet its obligations is an essential part of an effective resolution regime. In the first instance, liquidity would be expected to come from the firm’s own resources. But, where those resources are temporarily insufficient, and access to private sector funding is disrupted, the Bank has in place a flexible approach for the provision of liquidity in order to support the group resolution strategy. First, a firm in resolution would have access to the Bank’s published facilities, subject to meeting the necessary eligibility criteria. Second, to supplement those arrangements the Bank also has a flexible Resolution Liquidity Framework providing the tools to lend to banks, building societies or investment firms subject to the resolution regime, where the entity or its holding company is in a Bank of England led resolution.
On 26 February 2020, the Bank published its policy on collateral referencing Libor for use in the SMF. The policy was subsequently updated on 7 May 2020 and 24 March 2021. The policy adopted a haircut glide path for collateral referencing Libor and maturing after end-2021 (where Libor refers to GBP Libor, 1-week and 2-month USD Libor settings, EUR Libor, JPY Libor and CHF Libor). On 1 April 2021, a 10 percentage point haircut add-on was applied to such collateral. The add-on became 40 percentage points on 1 September and will rise to 100 percentage points on 31 December. The Bank may consider waiving or removing such add-on for collateral where it is satisfied that the Libor transition mechanism implemented by SMF participants meets certain conditions aimed at protecting public money, and subject to SMF participants completing the required due diligence.footnote  Since 1 April 2021, newly issued Libor-Linked Collateral has been ineligible for use in the SMF. In light of the FCA’s announcement on 5 March 2021, the Bank is currently considering its policy for collateral referencing the remaining USD Libor settings.
As of 26 February 2021, collateral referencing Libor rates (including the remaining USD Libor settings) stood at £9 billion.
The Bank monitors the risks posed through holdings of sterling commercial paper purchased by the CCFF. One of the more innovative aspects of the scheme allowed firms without public investment grade ratings from credit rating agencies to evidence their investment grade status via bank or private agency ratings. This significantly expanded the number of firms that were eligible for the scheme and reduced the potential cost for firms without public ratings. Over 50% of the firms that signed up to the scheme did not have public ratings.
8.2: Key climate-related risks to the Bank’s financial operations
The Bank has a risk management framework that spans all of the Bank’s functions, and includes climate risks. This framework sets out how risks (including those related to climate change) are identified, assessed, managed, monitored and reported.
The risk framework is used to monitor exposure to climate change and how it could impact the resilience of the Bank’s financial and physical operations. To analyse climate risk in both these areas, the Bank focuses on two transition channels. These are the risks arising from the adjustment towards a net-zero economy (‘transition risks’), and those created from changes in the long-term climate (‘physical risks’).
The Bank has taken several steps to integrate climate risk management across its financial operations, as set out in Figure 4. This includes prioritising enhanced information gathering to improve its ability to identify the nature and size of potential climate risks affecting its exposures.
For more information on the Bank’s approach to managing climate risk, please see the most recent climate-related financial disclosure report.