By Andy Bruce
(Reuters) - The Bank of England on Wednesday set out details of a new financial stability tool that insurers and pension funds will be able to use during severe turbulence in the British government bond market.
The BoE said the Contingent Non-Bank Financial Institution Repo Facility (CNRF) will allow companies to borrow cash from the BoE, using gilts they own as collateral, and would be open to applications from the fourth quarter of this year.
The new repo facility, partly outlined by the BoE this March and in September last year, is a response to crises that have affected Britain's 2.4-trillion-pound ($3.1 trillion) government bond market in recent years.
A "dash for cash" when economies went into lockdown in March 2020 to tackle the COVID-19 pandemic forced central banks to inject liquidity into markets to stop some funds from freezing.
It prompted regulators to take a closer look at how non-banks such as funds, insurers and others, which account for half of UK financial assets, cope with market stresses.
The BoE had to intervene in September 2022 to buy gilts, after their yields rocketed following then Prime Minister Liz Truss' plans for unfunded tax cuts, creating problems for liability-driven investment (LDI) funds used by pension funds.
LDI funds, pension funds and insurers will be eligible to use the new repo facility.
"It is expected that the CNRF would be activated when the Bank, in its sole discretion, judges there to be significant gilt market dysfunction presenting risks to UK financial stability," the BoE said.
Use of the facility will be charged at a spread over Bank Rate, priced to be unattractive during normal times but attractive during times of market dysfunction.
($1 = 0.7737 pounds)