Central banks need to ‘keep up’ with markets says Mark Carney

15:50 25/10/2013 - Πηγή: BankWars

The Bank of England, Mark Carney said on Thursday night, is open for business. The governor’s message to the City was clear. The days when the Old Lady preached the perils of “moral hazard” without due

regard to financial pressures are well and truly over.

Under Lord King, its former governor, the BoE gained a reputation for taking an almost Victorian attitude to imperilled banks – with its reaction to the crisis surrounding failed Northern Rock in 2007 proving to be particularly sluggish.

Then, the former governor was gradually forced to relax his battle against moral hazard as he realised just how grave the crisis afflicting the sector had become.

Today, a new regime has arrived. Central banks need to “keep up” with financial market developments, Mr Carney said at a Financial Times event. The BoE is rolling up its sleeves and doing what is necessary to keep the banking sector humming – in both the normal course of business and in crisis conditions.

The BoE does not want its facilities for providing liquidity to the banking sector to be ornamental, Mr Carney explained. “We can catalyse more efficient and effective private collateral management by backstopping private markets.”

The terms on which the BoE will engage with the private banking sector will be significantly eased under the new governor’s framework. Banks will be able to borrow against a broader range of collateral, including portfolios of loans, for longer periods of time and in exchange for fees that in some cases will be halved.

“Banks can be confident that, when they want to use our facilities, they will be allowed to access them,” the governor said.
This, he stressed, should not be taken as a sign that the BoE was becoming a soft touch. Mr Carney insisted last night that the bank was not “cheerleading for the City”.

With supervision returned to the central bank from the now-defunct Financial Services Authority, it is in a much better position to know whether its private counterparties are running their operations in a prudent fashion. On top of that, new liquidity regulations will ensure that banks do not leave themselves so exposed to sudden market freezes.

The reforms follow a report delivered by veteran banker Bill Winters which said the BoE’s liquidity systems were “robust and broadly fit for purpose” but that the bank needed to find ways of reducing the stigma attached to banks seeking liquidity through its discount window facility.

Accordingly the BoE’s discount window facility, which banks can approach confidentially when they are facing temporary cash crunches, will have a lower, flat-rate “entry fee”. The BoE will delay the disclosure of any use of the facility as it seeks to minimise the risks of banks being punished in the markets for accessing it.

The BoE’s indexed long-term repo auction, a standard monthly facility, will also be cheaper and will be offered against a broader range of collateral and for an extended term. On top of this, the BoE is making permanent its extended collateral term repo – a facility aimed at quelling periods of market-wide stress that was introduced last year at the height of the euro crisis.

Mr Carney said he will consider going further and extending access to its regular facilities to non-banks, raising the prospect that broker-dealers could be welcomed to the inner circle of BoE counterparties. The central bank will also review the possibility of providing liquidity in currencies other than sterling, cementing its status as one of the prime global financial centres.

“None of this means financial institutions are excused from the need to manage their balance sheets prudently,” Mr Carney said. “But as Bill Winters observed, more exacting liquidity requirements mean the conditions for using central bank facilities can be less stringent and more effective.”

Underlying the more generous terms being offered to the City is a recognition that the financial system around the world is still benefiting from extraordinarily generous emergency facilities – including quantitative easing and the bank’s Funding for Lending Scheme.

These cannot be kept in place for ever. The ruckus in financial markets that accompanied the Federal Reserve’s decision to toy with “tapering” its asset purchases this year sounded alarm bells.

The BoE wants to make sure that it has a clear, predictable and accessible framework in place to cope with the financial strains that lie ahead when central banks finally make the transition back towards a more normal policy world.
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Shadow banks have nowhere to hide

Mark Carney’s in-tray is already groaning under the weight of his responsibilities in monetary policy, financial stability and banking supervision, writes Chris Giles. But the new Bank of England governor added a fresh ambition to his agenda answering questions after his speech last night: scrutiny of shadow banks.

Shadow banks are the dark and less regulated parts of the financial system that operate in a similar way to banks but are not banks. They have the power to be just as dangerous and undermine financial stability through their opaque structures, which are prone to freezing up in a crisis, leading to losses cascading across the financial system and potentially infecting the core. Agreeing there was no hiding place for shadow banking, Mr Carney said he wanted to turn their operations towards “market- based finance”.

“One of the themes of what I was trying to say was that good markets have robust infrastructure … and much of shadow banking doesn’t meet the required criteria.”

By seeking to legitimise shadow banking as a core part of regulated and legitimised operations in the City, Mr Carney took a stance much more open to risk than his predecessor Lord King, who wanted to close down operations that took similar risks to banks.

Πηγή: Financial Times