Bank of England: Innovations in the Bank’s provision of liquidity insurance via Indexed Long-Term Repo (ILTR) operations

The provision of liquidity insurance is a core function of the Bank of England. It directly supports the Bank’s mission to promote the good of the people of the United Kingdom by maintaining monetary and financial stability. The financial crisis illustrated that, in times of stress, market participants’ demand for liquidity insurance and the price they are willing to pay for it increases. The Bank, like other central banks, faced the challenge of needing to respond by providing large-scale liquidity insurance against a wide range of collateral.

Part of the Bank’s response included redesigning its existing long-term repo operations, with the objective of increasing the availability and flexibility of liquidity insurance provision. The operations now offer liquidity at longer maturities against the full range of Sterling Monetary Framework eligible collateral and at cheaper (auction-determined) rates.

Two automatic responses are now built into each Indexed Long-Term Repo (ILTR) operation. First, if the prices and quantities bid in the operation indicate that there are signs of increased stress on a particular set of collateral, a greater proportion of the liquidity made available by the Bank is lent against that set. Second, the operation is no longer limited to supplying a fixed quantity of liquidity. Instead, as the pattern of bids observed in the operation suggests a greater overall demand, the total quantity of liquidity made available is automatically increased. The allocation process achieves this by maximising the combined ‘surplus’ of both producer and consumer.

The full paper is available here:

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