IMF urges UK to give non-banks access to liquidity in market crises

[December 14, 2021]  LONDON (Reuters) - Britain should consider giving 'non-banks' access to its repurchase agreements and government bond operations as a source of liquidity in stressed markets, the International Monetary Fund recommended on Tuesday.

 The International Monetary Fund (IMF) logo is seen outside the headquarters building in Washington, U.S., September 4, 2018. REUTERS/Yuri Gripas/File Photo

Non-banks comprise hedge funds, mutual funds, pension funds, money market funds and insurance companies, which collectively now account for half of global financial activity.

The Bank of England, like its counterparts in the United States and the euro zone, injected liquidity into markets as economies went into lockdown in March 2020 to fight COVID-19, creating a "dash for cash".

Intervention prevented money market funds and other market participants from freezing up, but regulators globally are looking at what measures can be taken to avoid having to do the same again in the next market crisis.

This is a major cross-border challenge, the IMF said in an assessment of Britain's economy and financial system.

"Meanwhile the authorities should strengthen backstops to the functioning of core markets in times of stress by considering allowing appropriately regulated, large, interconnected non-bank financial intermediaries access to repo and/or Gilt purchase operations," the IMF said.

Banks already have access to such operations.

'MAJOR STRIDES'

The IMF said the financial cycle in Britain appeared to be slightly ahead of the economic one, and it called for continuing "assiduous macroprudential and supervisory vigilance".

It welcomed the BoE's decision on Monday to require banks to build up their "rainy day" capital buffers, adding that Britain had made "major strides" in laying out its post-Brexit financial sector frameworks.

"At the same time, as the UK concludes a review of its own post-Brexit financial regulatory framework, it will be important to preserve the primacy of financial stability objectives and safeguard the robust management of domestic and cross-border macroeconomic and financial sector systemic risks," it said.

Britain's finance ministry has proposed that UK regulators have an objective of maintaining the competitiveness of the financial sector, which had raised concerns at the BoE.

(Reporting by Huw Jones; Editing by Gareth Jones)

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