New liquidity rules for UK banks, announced by the Financial Services Authority on Monday, slightly overshadowed an announcement from the Bank of England on the subject of reserves accounts.
As the BoE press release noted (our emphasis):
The Bank has today announced in a Market Notice a widening in the population of institutions eligible to apply for Reserves Accounts under the Bank’s Sterling Monetary Framework (SMF) Facilities. The Bank is widening eligibility in order to assist smaller institutions to manage their liquidity. The Financial Services Authority (FSA) has also today published a paper — ‘Strengthening Liquidity Standards’ — which sets out their liquidity proposals for authorised institutions.
Formerly, only institutions required to place cash-ratio deposits (CRDs) with the Bank — that is institutions with an average level of Eligible Liabilities of £500mn or more — were eligible to apply for Reserves Accounts. Henceforth, all institutions that are subject to the statutory CRD regime — that is all institutions reporting their Eligible Liabilities to the Bank — will be eligible to apply for a Reserves Account. Newly eligible institutions will also be able to apply to access the other SMF Facilities.
According to Marc Ostwald at Monument Securities, if this signals anything, it signals the Bank of England won’t — despite much speculation — be cutting the remuneration rate on bank deposits held at the central bank any time soon.
As Ostwald told FT Alphaville on Tuesday (our emphasis):
This has been a bug bear of the smaller banks and Building societies for some time, particularly during this period when the wholesale money markets have not been working, and thus left these institutions of the largesse of the big banks, particularly in terms of credit lines.
Overall it should put some very, very modest upward pressure on ultra short-dated Gilt yields/money rates, as it implies a cut in the BoE’s remuneration rate on deposits is not going to be cut, as had been speculated, otherwise there would be no point in giving these smaller institutions access to this facility, and hence they will not be offering money in the wholesale markets to the extent that they have been.
And as he also notes:
Equally and perhaps more importantly it also gives the BoE access to regular information on the state of these smaller institutions’ liquidity books. I am sure the fact that this announcement came on the same day as the FSA announcement on liquidity book funding and holdings was no coincidence …
Related links:
What’s the fuss over negative deposit rates? – FT Alphaville
Morgan Stanley: The BoE will cut deposit remuneration – FT Alphaville
Mervyn King’s bank deposit slap down – FT Alphaville