Executive Summary
The Bank regularly reviews its published framework for market operations conducted in support of monetary and financial stability, including those delivered through the Sterling Monetary Framework (SMF). The Bank’s operations are conducted to implement Monetary Policy Committee (MPC) policy decisions by transmitting Bank Rate and purchasing assets; and to safeguard financial stability by offering various forms of liquidity to the financial system. A list of the operations that are considered by this review can be found in the Bank’s Market Operations Guide. In the main, the Bank’s market operations are undertaken in sterling, but facilities also exist in a range of foreign currencies. Operations are also conducted both across the Bank’s own balance sheet and via subsidiaries.
The Bank aims to publish a short, factual report each year covering key developments in facilities and their usage. In addition, every three years the Bank aims to publish a more in-depth evaluation of its market operations, allowing for a stocktake of policy developments over a broader time period. This is a short report covering the period March 2021 to end-February 2022, following last year’s broad review.
Overall usage of the Bank’s facilities continued to increase throughout the review period, driven by lending in the Term Funding Scheme with additional incentives for Small and Medium-Sized Enterprises (TFSME); and continued execution of asset purchases in response to MPC policy decisions. This activity largely relates to measures taken by the Bank in response to the effects of the Covid pandemic. These measures began to wind down during the year: for example, the Covid Corporate Financing Facility (CCFF) closed to new business in March 2021 and was fully repaid on 18 March 2022; the TFSME closed to new business in October 2021; and the Bank completed its most recent programme of Asset Purchase Facility (APF) asset purchases in December 2021.
In addition to the expansion of asset purchases, the Bank acted during the period to maintain previous stocks of sterling non-financial investment-grade corporate bonds held by the APF. Notably, in November 2021 the Bank commenced a programme of purchases to restore the size of the Corporate Bond Purchase Scheme (CBPS) to its target of £20 billion, following a number of bond maturities. In response to changes to the MPC’s remit, and to support the government’s net-zero goal, the Bank agreed principles and tools to take into account the climate impact of bond issuers when making these reinvestments. A total of £852.5 million of corporate bonds were purchased during the course of the reinvestment programme. Further details on the Bank of England’s greening principles can be found in Box A.
In response to economic conditions, the MPC voted to increase Bank Rate at its meetings in December 2021 and February 2022. These increases were passed on smoothly to market rates. At its February meeting, the MPC also agreed that the Bank should cease to reinvest any maturities falling due from its stock of sterling non-financial investment-grade corporate bond or UK government bond purchases, and agreed that the Bank should initiate a programme of corporate bond sales to be completed no earlier than towards the end of 2023. As a result, the APF’s holding of the gilt maturing on 7 March 2022 – shortly after the end of the review period of this report – was not reinvested.
1: Objectives of the Bank’s operations
The Bank’s mission is to promote the good of the people of the United Kingdom by maintaining monetary and financial stability. Its balance sheet plays a central role in supporting these objectives by enabling the Bank’s facilities and operations in sterling markets.
Further detail on the Bank’s objectives and facilities are outlined in the Bank’s Market Operations Guide.
2: Activity in monetary policy facilities
2.1: Reserves Accounts
Reserves accounts are sterling-denominated instant access accounts offered to eligible financial firms. There is currently no maximum or minimum balance for most participants. Reserves accounts can be used by SMF members for settlement of obligations arising as a result of direct participation in UK payment systems.
The Bank implements the MPC's interest rate decisions by applying Bank Rate to reserves balances. This keeps short-term market interest rates in line with Bank Rate. The Bank currently remunerates reserves balances in full at Bank Rate for banks, building societies and broker-dealers. Central Counterparties (CCPs) and International Central Securities Depositories (ICSDs) are required to maintain a target daily average reserves balance in order to receive remuneration at Bank Rate.
At the beginning of the review period, Bank Rate was 0.1%. At meetings in December 2021 and February 2022 the MPC voted to raise Bank Rate in order to meet the 2% inflation target. The Bank Rate at the end of the review period was 0.5%.
The Bank monitors market interest rates to assess the effectiveness of monetary policy implementation. Both secured and unsecured rates responded to the increases to Bank Rate in an orderly fashion as shown by changes in SONIA, an unsecured overnight benchmark rate, and RONIA, a secured overnight benchmark rate (Chart 1).
Chart 1: Sterling overnight interest rates (a)
Footnotes
- Sources: Bank of England and WMBA Ltd.
- (a) Transactions included within the SONIA calculation are unsecured, of one-day maturity, settled same-day, and greater than or equal to £25 million in value. RONIA (Repurchase Overnight Index Average) is based on brokered sterling overnight transactions where collateral is provided as a security.
The amount of reserves increased significantly during the review period, from £799.3 billion to £966.4 billion at the end of the review period, with a peak of £978.9 billion in January. This was mainly driven by APF asset purchases (£121.6 billion) and TFSME drawings (£116.9 billion), offset by the maturity of TFS loans (£39.5 billion), CCFF loans (£10.1 billion), and other autonomous factors.
Chart 2.a: Outstanding amounts lent in SMF liquidity facilities and funding schemes 2012–22 (a)
Chart 2.b: Outstanding amounts lent in SMF liquidity facilities and funding schemes in the review period (a)
2.2: Asset Purchase Facility
The Bank purchases gilts and corporate bonds to implement monetary policy as set by the MPC. These purchase operations are conducted through the APF.
In December 2021 the Bank completed its execution of the MPC’s decision to increase asset purchases to £895 billion, comprising UK government bond purchases of £875 billion and non-financial investment-grade corporate bond purchases of £20 billion.
In addition to these new asset purchases, in November 2021 the Bank commenced a programme of corporate bond purchases with a total value of £852.5 million to reinvest the proceeds of bond maturities in the CBPS. Prior to the purchase programme, the Bank agreed a set of greening principles and tools to take into account the climate impact of bond issuers when making purchases. Further details on the greening principles adopted and the tools used can be found in Box A.
The MPC announced at its February 2022 meeting that it would begin to reduce the stock of purchased assets. The MPC agreed that the Bank of England should cease to reinvest any maturities in gilts and corporate bonds, and asked for a programme of corporate bond sales to be completed by no earlier than towards the end of 2023.
2.3: Funding schemes
The Bank operated three funding schemes during the review period – the Funding for Lending Scheme (FLS), the Term Funding Scheme (TFS) and the TFSME. Of those schemes, only the TFSME was open to new business during the review period, while the final loans made through the FLS and TFS were repaid allowing the schemes to be closed.
2.3.1: The Term Funding Scheme and TFSME
The Bank offered loans via the TFS to support the pass-through of the cut to Bank Rate in August 2016, providing four-year cash funding – typically at an overall cost equal to Bank Rate – to participating firms. This scheme was closed to new drawings in February 2018 and the final loans matured during February 2022. All loans were repaid in full.
The TFSME was announced in March 2020 as part of the Bank’s response to the Covid pandemic. Like the TFS, its purpose was to support the pass-through of Bank Rate, although the TFSME contained additional features designed to incentivise banks to provide credit to small and medium-sized enterprises (SMEs) in particular. The TFSME was open for new lending from 15 April 2020 to 31 October 2021.
Usage of the TFSME increased from £75.4 billion to £192.4 billion during the review period. The increase in usage of the TFSME was partly driven by refinancing activity by firms whose TFS loans matured during the period. New drawings were also skewed towards the final months of the scheme, with £93.0 billion lent via the TFSME in October 2021 which was the final month that the scheme was open to new drawings.
2.3.2: The Funding for Lending Scheme
The FLS was launched in 2012, to incentivise banks and building societies to boost their lending to UK households and private non-financial corporations. The FLS closed to purchases on 31 January 2018 and the final loans matured in September 2021. All loans were repaid in full.
3: Activity in liquidity insurance facilities
3.1: Operational Standing Facilities
The Bank’s Operational Standing Facilities (OSFs) allow participating firms to deposit or borrow reserves on an overnight basis throughout each business day. We apply a premium of 0.25% above Bank Rate on lending and pay a return of 0.25% below Bank Rate on deposits.footnote [1]
There was occasional usage of the OSF Deposit Facility during the review period, although the amount was not significant in light of the overall level of reserves. This usage was driven by CCPs and ICSDs who are required to maintain a pre-determined target balance on their reserves accounts, and who used the OSF Deposit Facility as intended to manage excess reserves.
There was no usage of the OSF Lending Facility during the reporting window.
3.2: Indexed Long-Term Repo and Contingent Term Repo Facility
The Indexed Long-Term Repo (ILTR) is the Bank’s regular market-wide sterling operation. Since 2019, ILTRs have been offered on a weekly basis, the frequency having initially been increased on a temporary basis in response to uncertainty related to the UK’s exit from the EU, and later the Covid crisis. The ILTR is designed to allow market participants to borrow central bank reserves for a six-month period against the full range of eligible collateral.
Usage of the ILTR remained broadly stable during the review period, falling from £4.6 billion at the start of the period to £2.9 billion at the end of the period.
The Contingent Term Repo Facility (CTRF) allows the Bank to provide liquidity against the full range of eligible collateral at any time, term, and price. The facility can be activated in response to any actual or prospective market-wide event, but was not used during the review period.
3.3: Discount Window Facility
The Discount Window Facility (DWF) is a bilateral on-demand facility provided to institutions anticipating or experiencing an unexpected liquidity need. It allows participants to borrow gilts in return for less liquid collateral in potentially large size, either to bridge to the next ILTR auction or for a variable term. The Bank may lend sterling cash instead of gilts to smaller participants or if, for example, government bond repo markets fail to function properly.
The Bank publishes quarterly data of DWF usage with a five-quarter lag. There was no DWF usage reported during the review period (relating to activity between September 2019 and September 2020). However, the Bank undertakes a regular programme of test trades with DWF participants and applicants to ensure operational readiness.
3.4: Non-sterling facilities
The Bank’s US dollar repo operation offers to lend dollars on a weekly basis. Participants can bid for unlimited funds for a 7-day term at fixed spread, secured against Level A, B and C collateral. The facility makes use of the international network of standing swap lines between participating central banks; in this case the Bank makes use of the swap line with the US Federal Reserve.
There was minor usage of the facility during the review period, with aggregate drawings of $20 million representing small test usages.
The Bank suspended its Liquidity Facility in Euros (LiFE) operations effective from 1 October 2021. However, the standing swap line arrangement between the Bank of England and the European Central Bank (ECB) remains in place. The Bank, in co-ordination with the ECB, stands ready to re-activate this facility if market conditions warrant it.
3.5: Covid Corporate Financing Facility
The Covid Corporate Financing Facility (CCFF) was introduced in 2020 to support liquidity available to larger corporations, helping them to bridge coronavirus-related disruption to their cash flows through the purchase of short-term debt in the form of commercial paper.
The CCFF closed to new purchases in March 2021 as planned, with loans maturing during the course of the review period. At the start of the review period, outstanding loans stood at £11.2 billion. At the end of the review period, outstanding loans had fallen to £1.1 billion, and the final loans matured on 18 March 2022. All loans were repaid in full, as confirmed by an exchange of letters between the Governor and Economic Secretary of the Treasury on 24 March 2022.
3.6: Alternative Liquidity Facility
The Bank launched the Alternative Liquidity Facility (ALF) in December 2021. It is a deposit facility available to UK banks which face formal restrictions on engaging in interest-bearing activity, including but not limited to Islamic banks. Further information about the facility can be found in Box C.
The Bank will publish monthly average aggregate data on ALF usage each quarter, with a one-quarter delay. The Bank had not published any usage of this facility at the time of publication of this report.
4: SMF Membership
Firms that wish to use the Bank’s facilities must typically sign up to the SMF. SMF membership increased in 2021–22 from 218 to 223 participants. In addition, six existing participants signed up for access to additional facilities.
Interest in joining the SMF comes from a range of firms, both UK banks and those headquartered outside of the UK. Some are new firms, while others are existing SMF participants wishing to sign up for additional facilities (Chart 3).
During the review period, the Bank widened access to the SMF to accept ICSDs as eligible institutions. This change recognises the role played by ICSDs in the financial system as the custodians and settlers of securities transactions.
The Bank continues to keep its SMF access policy under review.
Chart 3: SMF membership
Footnotes
- Source: Bank of England.
5: Risk management
While the Bank’s market operations are designed to deliver monetary policy and to support financial stability, it is vital that facilities are designed and run in a way that ensures risks to public funds are properly managed.
There is a presumption of access to the SMF for firms that meet Prudential Regulation Authority (PRA) supervisory threshold conditions and which have the requisite collateral. A firm’s SMF eligibility is subject to a regular and independent review of creditworthiness by the Bank’s financial risk management function. The due diligence process includes a regular review of the firm’s business viability and strategy, asset quality, funding and liquidity, and both current and prospective capital position. The resulting firm rating enables the Bank to monitor its risk and exposures by the underlying riskiness of its counterparties across multiple operations. To produce credit assessments, data and information are sourced from PRA supervisory colleagues, publicly available information such as annual reports and news items, and the member firms themselves, including through onsite interviews with the firm’s executive management, where appropriate.
This analysis is reviewed and updated regularly. Provided the firm still meets threshold conditions and is not failing or likely to fail, then there is a presumption that the Bank will lend to that firm. All lending under the SMF is secured against collateral. The Bank’s eligible collateral list is very broad, including a wide range of securities and portfolios of residential mortgage loans, asset finance, consumer, auto, corporate, SME, private finance initiative, social housing loans, loans and asset finance under the coronavirus business interruption loan scheme or the coronavirus large business interruption loan scheme, and loans under the bounce back loan scheme.footnote [2]
Collateral haircuts are set to protect the Bank’s balance sheet in a severe stress by avoiding procyclicality – the intention is that haircuts would not need to be increased when lending is required. The Bank in principle accepts as eligible collateral any asset it judges it can effectively and efficiently risk manage. It does this to enable a broad range of counterparties to have access to SMF facilities. As at end February 2022, haircuts for SMF collateral start at 0.5% for sovereign securities, 12% for residential mortgage-backed securities or covered bonds, and 30% for portfolios of senior corporate bonds. Loan pool haircuts across all collateral types are 14%–70% (excluding Libor add-ons). Residential mortgage collateral continues to make up the majority of collateral delivered to the Bank.
The additional amount the Bank could lend through its market operations based on excess pre-positioned collateral stood at £315 billion on 28 February 2022. This is £57 billion less than on 26 February 2021, however during this period total collateral holdings increased by £19 billion.
Box A: Greening of the Corporate Bond Purchase Scheme
In November 2021 the Bank published details of its approach to greening its stock of non-financial investment-grade corporate bonds. This followed an update to the MPC’s remit in March 2021 which confirmed that the economic strategy of the Government – which the MPC is expected to support – includes the transition to net zero.
As was the case in previous years, the Bank commenced a programme of corporate bond purchases in November 2021 to reinvest the proceeds of matured corporate bonds. Notably in 2021, to support the government’s net-zero goal, the Bank agreed principles and tools to take into account the climate impact of bond issuers for this programme of purchases.
The high-level principles were: (1) that the Bank’s approach should incentivise firms to take decisive actions that support an orderly transition to net zero; (2) that the Bank would lead by example, while learning from others, and; (3) that requirements should be ratcheted up over time as data and metrics improve.
These principles were put into action by using four tools:
- Eligibility: firms were incentivised to measure and disclose their exposures, and the Bank did not consider firms who participated in actions that scientific evidence suggested were incompatible with the country’s net-zero target.
- Targets: initially, the Bank aimed to reduce the carbon intensity of bonds held in the portfolio by 25%, with a longer-term aim of net zero by 2050.
- A process called ‘tilting’: during the 2021 reinvestment round bond purchases were skewed towards those firms who were making strongest progress towards their net-zero targets (and away from those assessed to be making least progress).
- Escalation: the Bank aimed to progressively tighten the overall requirements over time.
The Bank successfully tilted annual CBPS reinvestments in 2021/22 towards those issuers who scored higher on a scorecard which classified eligible issuers into four categories (‘ABCD’) based on a range of climate factors (including firms’ emissions, emissions intensity, targets and disclosure status). 95% of purchases made during the reinvestment round were made in categories A and B (the two ‘greener’ ones) and none in category D.
At its February meeting, the MPC agreed that the Bank should initiate a programme of corporate bond sales to be completed no earlier than towards the end of 2023. The Bank will have regard to greening when deciding which bonds can be sold on a given day, and in calibrating which bids are accepted in auctions, for this programme of sales.
Box B: Update on a Central Bank Digital Currency
Together with HM Treasury, the Bank continues to explore how a central bank digital currency (CBDC) could be used in the UK. CBDC would be a new form of digital money issued by the Bank, for use by households and businesses for their everyday payments needs. It would exist alongside cash and bank deposits.
In April 2021, the Bank and HM Treasury announced the creation of a joint CBDC Taskforce. This body ensures a strategic approach is adopted between UK authorities as they explore CBDC, in line with their statutory objectives. The Bank also announced the creation of a CBDC Engagement Forum and a CBDC Technology Forum. These will engage stakeholders and gather input on CBDC.
Following publication of a discussion paper on the opportunities and risks around CBDC in March 2020, the Bank published a summary of responses in June 2021 – as well as an additional discussion paper in June 2021 on new forms of digital money. This set out further analysis on the possible opportunities and risks a CBDC and systemic stablecoin could bring.
In November 2021, the Bank and HM Treasury announced the next steps in the exploration of a CBDC. A consultation will be launched in 2022, which will set out their assessment of the case for a UK CBDC, including the merits of further work to develop an operational and technology model for a CBDC. The 2022 consultation will inform a decision on whether the authorities are content to move into a ‘development’ phase which will span several years. No decision has been made on whether to introduce a UK CBDC, but if the results of this ‘development’ phase conclude that the case for CBDC is made, and that it is operationally and technologically robust, the earliest launch date would be the second half of this decade.
Earlier in June 2022, Hauser (2022) discussed how central bank balance sheets may need to adapt to digital currencies.
Box C: The Alternative Liquidity Facility
In December 2021 the Bank launched the Alternative Liquidity Facility (ALF), which is a fund-based deposit facility available to UK banks which face formal restrictions on engaging in interest-bearing activity. As a result, these firms – which include but are not limited to Islamic banks – are unable to participate in the Bank of England’s other facilities under the Sterling Monetary Framework (SMF).
Deposits in the ALF are backed by a portfolio of high quality eligible assets. These deposits and backing assets are held on a segregated basis by a separate entity – the Bank of England Alternative Liquidity Facility Limited (BEALF), which is a wholly owned subsidiary of the Bank.
Returns generated from the backing assets may be passed back to depositors in lieu of interest, net of the Bank’s hedging and operational costs. Deposits in the ALF are treated as ‘Level 1’ HQLA for the Liquidity Coverage Ratio (LCR) under the Capital Requirements Directive and Capital Requirements Regulation. For the ALF’s participants, this enables greater flexibility in meeting regulatory requirements under Basel III prudential rules.
The ALF has been used regularly since its launch in December. The first publication of usage data is scheduled to take place in July 2022.
Annex
Table A.1: Results of operations and funding scheme drawings
(£ millions) | Q1 2021(b) | Q2 2021 | Q3 2021 | Q4 2021 | Total stock outstanding Feb 2022(c) | |
|---|---|---|---|---|---|---|
OSF(d) | 0 | -1,364 | -254 | -598 | -41,747 | 0 |
ILTR(d) | 4,613 | 1,360 | 1,730 | 580 | 1,981 | 2,891 |
- Level A | 4,075 | 1,165 | 1,695 | 475 | 1,740 | 2,355 |
- Level B | 73 | 50 | 20 | 80 | 36 | 91 |
- Level C | 465 | 145 | 15 | 25 | 205 | 445 |
CTRF(d) | 0 | 0 | 0 | 0 | 0 | 0 |
FLS(e) | 142 | -1 | -88 | -53 | 0 | 0 |
TFS(f) | 39,452 | -21,163 | -4,831 | -10,369 | -12,856 | 0 |
TFSME(f) | 75,412 | 5,886 | 14,934 | 11,356 | 92,492 | 192,361 |
CCFF(g) | 11,225 | 4,973 | 0 | 0 | 0 | 1,079 |
Footnotes
- (a) Aggregate drawings outstanding as at 28 February 2021.
- (b) Data for 28 February 2021 and the 2021 Q1 period may reflect minor corrections in our records compared to figures reported in the previous report.
- (c) Aggregate drawings outstanding as at 28 February 2022.
- (d) Quarterly OSF, ILTR and CTRF figures reflect value of new drawings during the quarter. Quarterly FLS, TFS, TFMSE and CCFF figures reflect value outstanding at quarter-end.
- (e) FLS and FLS extension, net drawdowns for each period (drawdowns less repayments and maturities).
- (f) TFS and TFSME, net drawdowns for each period (drawdowns less repayments and maturities).
- (g) CCFF, sum of weekly CP purchases in the primary and secondary market over the quarter.
Table A.2: Balances held in reserves accounts
(£ millions) | 2021 Q1(b) | 2021 Q2 | 2021 Q3 | 2021 Q4 | Total(c) | |
|---|---|---|---|---|---|---|
Reserves balances(d) | 799,339 | 784,860 | 817,283 | 846,357 | 932,743 | 966,445 |
Footnotes
- (a) Total reserves balance as at 28 February 2021.
- (b) Data for 28 February 2021 and the 2021 Q1 period may reflect minor corrections in our records compared to figures reported in the previous report.
- (c) Total reserves balance as at 28 February 2022.
- (d) Quarterly reserves balances are averages for maintenance periods (the period between MPC meetings) finishing within the quarter, as at quarter-end.
When Bank Rate decreased from 0.25% to 0.10% on 19 March 2020, the OSF Deposit Facility rate was kept at zero instead of 0.25% below Bank Rate.
Details of eligible collateral can be found on the Bank’s website.