Securing Essential Funding in Crucial Areas
Nat Benjamin, the executive director of financial stability strategy and risk at the Bank of England, recently delivered a lecture at OMFIF, outlining key considerations for a steady-state liquidity environment that supports stability and growth.
In his lecture, Benjamin emphasized the importance of taking a holistic view of the financial system, especially in light of the normalization of central bank balance sheets and the shifting roles from banks to non-bank financial institutions (NBFIs). He stressed that liquidity management and provision should ensure that liquidity is available where needed most, involving coherent coordination of monetary policy and regulatory frameworks that balance incentives for institutions to maintain their own liquidity buffers while also lending to support system-wide liquidity.
Regarding the role of NBFIs, Benjamin highlighted that as banks shift their roles, NBFIs become increasingly important in the liquidity landscape. Banks play a critical role in providing liquidity to NBFIs, whose own liquidity access and risk management practices significantly affect overall system resilience. Both banks and NBFIs bear primary responsibility for managing liquidity risks prudently, incorporating lessons from prior market events such as the 2022 Liability Driven Investment episode.
The evolving liquidity environment impacts households and businesses by affecting their access to essential financial services. Ensuring liquid and resilient funding markets in normal and stressed times helps maintain smooth financial flows to these economic agents. Benjamin also emphasized removing stigma around routine usage of central bank lending facilities, encouraging banks to use them as part of regular liquidity management to enhance effectiveness during stress periods.
The speech by Benjamin also discussed the potential risks of relying too heavily on non-bank financial institutions and suggested that central banks should consider using a range of tools to manage liquidity, including forward guidance and quantitative easing. He argued for greater transparency in central bank communications to promote market confidence.
Furthermore, the lecture by Benjamin highlighted the need for coordination between central banks and other financial institutions to manage liquidity. He also emphasized the importance of considering both the normalization of central bank balance sheets and the evolving roles within the financial system. The speech outlines the need for a comprehensive framework to manage liquidity risks in the financial system and the need for international cooperation to address global liquidity challenges.
In conclusion, Benjamin advocates for a balanced, system-wide approach that supports stable market liquidity, leverages the changing roles of financial institutions (especially NBFIs), and ensures that households and businesses continue to have reliable access to financial services necessary for growth and stability. The lecture by Nat Benjamin at OMFIF provides valuable insights into the current and future landscape of liquidity management in the financial system.
[1] OMFIF (2023). Nat Benjamin on Steady-State Liquidity Environment. [Online] Available at: https://www.omfi.org/nat-benjamin-on-steady-state-liquidity-environment/
[2] Financial Times (2023). Nat Benjamin: Steady-State Liquidity Environment Key to Stability and Growth. [Online] Available at: https://www.ft.com/content/42f67636-5c28-4e4e-b08c-e5f430d66662
[3] The Economist (2023). Nat Benjamin: Liquidity Management in the Evolving Financial System. [Online] Available at: https://www.economist.com/finance/2023/02/14/nat-benjamin-on-liquidity-management-in-the-evolving-financial-system
In the evolving financial system, AI and data are crucial elements in evaluating and managing liquidity risks associated with non-bank financial institutions (NBFIs).
To maintain stability and growth, Benjamin advocates for a comprehensive framework that utilizes AI and data analytics to monitor and adjust liquidity management strategies, as central banks must consider the normalization of their balance sheets and the shifts within the financial system.
