(Bloomberg) -- Banks borrowed a record amount of cash from the Bank of England’s weekly liquidity tool to prepare for a seismic shift in sterling money markets as the central bank winds down its balance sheet.
Financial institutions tapped the BOE’s short-term repo (STR) facility, which provides cash in return for pledging gilts, for over £30 billion ($39 billion) this week, according to a central bank notice. That’s up from £700 million at the start of the year.
Banks are relying more on repos for funding as the BOE shrinks its balance sheet after years of expansionary programs. While officials have welcomed the increased STR usage, executive director for markets Vicky Saporta said Monday she would like to see more borrowing from a separate six-month tool that allows a wider range of assets to be pledged as collateral.
Unlike the STR, the six-month indexed long-term repo facility allows banks to pledge illiquid assets such as commercial loans in return for reserves. Saporta said officials are currently “reviewing the calibration of the ILTR to ensure it is effective and attractive enough.”
Earlier this week, banks borrowed just £25 million from an ILTR operation. Total loans outstanding amount to around £2.5 billion.
There are also risks of relying only on short-term repos, including operational challenges. A technical issue like the one that resulted in a delayed repo operation in May could make the market nervous the funding won’t be replaced.
Citigroup Inc. strategists including Jamie Searle said Saporta’s “focus on ILTR may alleviate any concern that rising STR usage will encumber gilts.”
The ongoing shift in sterling cash markets toward repo operations aims to reduce the risk that banks cannot access funding when reserves drop too low. They are currently above £700 billion, compared to a peak near £1 trillion in early 2022.
Last month, members of the BOE’s money markets committee said the level of reserves required by banks may be higher than the central bank’s current estimate of between £345 billion and £490 billion.
The point where reserves start to become scarce may come “as soon as next year so we all need to be ready,” Saporta said at a Q&A following an AFME event on Monday. “What worries me the most is that we may not be ready for it.”
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