The Bank of England (BoE) has lowered the pricing on a funding tool designed to help banks withstand short-term liquidity shocks, a move that may boost the attractiveness of a facility only used once since its creation in 2008.
The central bank announced lower and fixed pricing for drawdowns from the Discount Window Facility, one of several measures it launched during the financial crisis to backstop markets. The DWF allows eligible banks, brokers and clearinghouses to borrow UK government bonds or cash against a wide set of less-liquid assets.
“This change to simplify and reduce DWF pricing will improve the usability of the DWF, whilst maintaining incentives for prudent day-to-day liquidity management and avoiding private market disintermediation,” the central bank said in a statement.
The changes are effective immediately and replace the previous system that had a more variable and complex pricing structure. The move is part of a broader overhaul of the BOE’s money-market strategy, to wean banks off years of abundant liquidity fueled by its bond-purchase programs. The idea is to ensure financial institutions can continue to source cash or liquid assets, even during times of stress.
The only reported usage of the DWF is from the final quarter of 2023, when average daily borrowing was £1.125bn ($1.5bn).
The new pricing system depends on the quality of the collateral. It’s set at 15 basis points for drawdowns against Level A collateral — the highest quality — and moves up to 50 basis points for Level C collateral.
Officials are keen to ensure resources such as the DWF are fit for purpose as the central bank continues to drain cash from the financial system. In December, it made a similar update to its Operational Standing Facilities, designed to help banks manage temporary payment frictions.
The central bank is increasingly providing cash to banks via scheduled repo operations. There is over £70bn outstanding at the six-month Indexed Long-Term Repo Facility, which is open on Tuesdays, according to BoE data. Recent one-week Short-Term Repo operations, which are held on Thursdays, have seen banks borrow around £100bn.
Unlike those two, the DWF is an on-demand facility. That means eligible financial institutions can tap it at any time instead of having to wait for one of the BoE’s scheduled repo operations.
While uptake has been tiny up to now, regulators are pushing banks to change their attitude toward both the DWF and OSFs. The Prudential Regulation Authority, the division of the BoE responsible for bank regulation, is currently consulting on rules designed to encourage use of the facilities.
If adopted, a key supervisory statement would urge banks to consider usage of the DWF and OSFs “as a complement to the regular, market-wide facilities for a broad range of circumstance.”
Disclosures regarding DWF usage are scarce in order to minimize potential stigma. Usage data is reported on an aggregated and averaged basis on a five-quarter delay — far longer than other BoE facilities.
“Our publication approach seeks to balance transparency with discretion about individual counterparty relationships, and to minimise any potential risks to financial stability through premature publication,” the BoE’s website states.
