The Bank of England is starting work on a new facility to lend to insurers and pension funds to help avoid a repeat of last year's bond market turmoil, Andrew Hauser, the BoE's executive director for markets, said on Thursday.
The BoE has a long-standing range of tools to lend to banks which have good quality collateral but find it hard to get ready cash during times of market stress.
However, there is no equivalent for non-bank financial institutions, forcing the BoE to take one-off measures last October after Prime Minister Liz Truss' "mini-budget" and during market turmoil at the start of the COVID-19 pandemic in 2020.
"We will be embarking, with immediate effect, on the design of a facility allowing us to lend to insurance company and pension funds - including newly-resilient LDI funds," Hauser said at an event hosted by MNI Connect.
These financial institutions are big holders of British government bonds which usually can be readily exchanged for cash but suffer from shortages of buyers at times of market turmoil.
Hauser said the BoE would look at expanding the lending facility to a wider range of non-banks over time but warned that the programme was not aimed at reducing financial firms' need to guard against day-to-day risks.
"It is central banks' job to protect the system against genuine threats to stability. But it is firms' job to protect themselves against a wide range of less severe shocks, and we cannot afford to conflate the two," he said.
(Reporting by David Millken Editing by William Schomberg)