The Bank of England is preparing a new lending instrument for pension funds and insurers.

In order to prevent a recurrence of the instability in the bond market from last year, the Bank of England is beginning work on a new facility to lend to insurers and pension funds, according to Andrew Hauser, the BoE's executive director for markets, on Thursday.

The BoE has a history of using a variety of instruments to lend to banks with strong collateral that struggle to obtain fast liquidity when the market is stressed.

For non-bank financial companies, there is no comparable, therefore the BoE was forced to take one-time actions in October after Prime Minister Liz Truss' "mini-budget" and amid market turbulence at the onset of the COVID-19 epidemic in 2020.

At an MNI Connect event, Hauser announced, "We will be starting right away on the design of a facility allowing us to lend to insurance company and pension funds, including newly resilient LDI funds."

These financial firms own significant amounts of British government bonds, which are often easily convertible into cash but occasionally struggle to find purchasers due to market unrest.

Hauser stated that the BoE will consider extending the loan facility over time to a larger variety of non-banks but cautioned that the scheme was not intended to reduce the requirement for financial businesses to take precautions against daily risks.

"It is the responsibility of central banks to defend the system against serious stability concerns. We cannot afford to mix up the two, as it is the responsibility of businesses to safeguard themselves against a variety of less severe shocks, he added.

(Sources: investing.com, reuters.com)