Excerpts from “Large central bank balance sheets and market functioning“, Bank for International Settlements Markets Committee, Oct 7 2019.
Securities lending programmes (SLPs) are a potent and flexible mitigation tool that can be deployed to alleviate scarcity issues for specific securities or across whole markets. SLPs can also ease shortages and support the functioning of related repo markets, which in turn can reduce settlement fails and facilitate the functioning of the cash market and other related markets (such as derivatives markets).
SLPs also capture incremental income for the central bank and are thus both profitable for the central bank and supportive of market functioning (and thus welfare- enhancing). SLPs were in place in a number of jurisdictions before the financial crisis, but were significantly expanded during and after 2008. Of the 10 central banks surveyed that conducted APPs, six added facilities during or after 2008.
The optimal design of an SLP remains a point of debate and depends on the characteristics of specific markets and institutional frameworks. Nonetheless, there are some broadly accepted principles; for example, an SLP should – like any balance sheet expansion programme – be implemented transparently and consistently, but at the same time evolve as the central bank’s presence in the market evolves. To ensure that they do not cause scarcity issues elsewhere, SLPs should also accept a broad range of collateral, while at the same time ensuring that the usual high degree of protection for the central bank balance sheet is maintained.