Providing necessary funds in a fluid manner
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Nat Benjamin, the executive director of financial stability strategy and risk at the Bank of England, delivered a lecture at OMFIF last month, focusing on the creation of a steady-state liquidity environment that supports stability and growth.
During his talk, Benjamin emphasised the importance of taking a holistic view, considering both the normalisation of central bank balance sheets and the evolving roles within the financial system. He highlighted the shift from banks to non-bank financial institutions as a critical structural change that requires regulators and policymakers to rethink liquidity policies and oversight.
Benjamin stressed that as the financial system changes—especially with technological innovation and regulatory adaptations—central banks and regulators need to adapt their strategies. This includes recognising how different financial actors contribute to liquidity and stability, and the need for updated frameworks that reflect these changes.
One of the key evolving roles within the financial system that Benjamin highlighted is the shift from banks to non-bank financial institutions. These entities, such as asset managers, insurance companies, and money market funds, play a growing role in liquidity provision and financial intermediation. This shift requires regulators and policymakers to rethink liquidity policies and oversight, ensuring that these entities contribute to financial stability rather than vulnerability.
Benjamin also discussed the implications of this shift for system-wide liquidity flows, as well as its impact on households' and businesses' access to essential financial services. He highlighted the importance of central banks carefully managing the reduction of their expanded balance sheets that were built up during crisis interventions. This normalization must be done in a way that avoids sudden liquidity contractions that could destabilize markets, ensuring an orderly transition to a steady-state liquidity environment.
In sum, Benjamin advocates a comprehensive approach where monetary authorities ensure that liquidity normalization respects market functioning without causing shocks, recognise and incorporate the evolving roles and risks given changes in financial intermediation, and adapt regulatory and supervisory frameworks to the changing market structure dominated increasingly by non-bank intermediaries. This approach is designed to maintain an environment conducive to long-term stability and economic growth.
This summary is based primarily on Nat Benjamin’s discussion in the OMFIF July 2025 Bulletin, where he outlines practical and strategic considerations for sustained liquidity and stability in a transforming financial system. The full lecture, delivered at OMFIF, does not contain any advertisements.
- In the transforming financial system, with the growing role of non-bank financial institutions like asset managers, insurance companies, and money market funds in liquidity provision and financial intermediation, regulators and policymakers need to reassess their liquidity policies and oversight, ensuring these entities contribute to financial stability rather than vulnerability.
- Central banks must manage the reduction of their expanded balance sheets carefully, avoiding sudden liquidity contractions that could destabilize markets and ensuring an orderly transition to a steady-state liquidity environment, especially considering the evolving roles within the financial system and the increasing influence of artificial intelligence and data in finance.
