The Bank of England (BoE) is taking steps to allow banks to pledge equities as collateral, in a move that would provide greater flexibility to banks during times of financial stress.
In a speech to money market dealers on Monday Chris Salmon, the Bank’s executive director for markets, said it is working to remove technical barriers to accepting equities as collateral.
“At present, the Bank accepts a very broad range of collateral, including government bonds, asset backed securities and pools of ‘raw’ loans. But the Bank can further bolster its flexibility by removing any technical obstacles to accepting equities as collateral, should the need arise,” says Salmon.
However Salmon added that due to certain complexities involved, the Bank anticipates that work to remove the technical barriers will not be completed until 2016.
The majority of equity collateral is predominantly managed by tri-party agents, such as BNY Mellon and J.P. Morgan. This is because pledging equities as collateral usually involves multiple lines of stock in any given collateral pool.
By allowing banks to pledge equities as collateral in return for central bank liquidity, it will offer greater flexibility in times of financial stress where high-grade collateral, such as cash, may not be readily available.