BoE's Saporta says UK banks should borrow more from its repo facilities

By David Milliken and Essi Lehto

LONDON/HELSINKI (Reuters) -Banks operating in Britain should make more use of the Bank of England's longer-term repurchase facilities, as central bank bond sales and other loan repayments drain liquidity, senior BoE official Vicky Saporta said on Wednesday.

Alongside Saporta's speech, the BoE announced changes taking effect next week to its indexed long-term repo facility that allows banks to borrow money from the BoE for a six-month term against a range of collateral.

Liquidity management is a way for central banks to ensure their official interest rates feed through the financial system to the wider economy and avoid market volatility caused by banks running temporarily short of cash.

Saporta, the BoE's executive director for markets, said the central bank estimated that the financial system could reach its "preferred minimum range of reserves" as soon as the second quarter of next year, depending on the pace of BoE bond sales and other factors.

"Firms must now fully consider the changing liquidity environment and their plans to source reserves within that," Saporta said in a speech at the Bank of Finland.

"That means borrowing in larger volumes routinely from the Bank, considering their market access, testing operations regularly and thinking actively about levels of pre-positioned collateral," she added.

To date, banks have made less use of the indexed long-term repo facility, or ILTR, than of its one-week Short Term Repo, which often draws more than 60 billion pounds ($81 billion) of demand. By contrast, the long-term facility draws around 1 billion pounds of demand a week.

"Firms should now be looking to use these facilities for routine liquidity management and not just as backstops," Saporta said.

SLOW CHANGE

The BoE has called for more use of these facilities before. But change has been slow, as for more than a decade the British financial system has had surplus funds as a result of money created due to quantitative easing and other programmes such as the BoE's Term Funding Scheme.

Much of these surplus reserves is in commercial banks' accounts with the BoE, and the central bank has had to pay out an increasing amount of interest on these deposits.

The BoE said the weekly amount available at the long-term repo facility would rise to 35 billion pounds from 25 billion pounds, increasing the total liquidity it could provide to Britain's financial system to 840 billion pounds.

The amount of reserves banks can borrow at the cheapest rate - which requires the highest quality collateral - will rise to 8 billion pounds a week from 5 billion pounds, and the costs of borrowing will rise more gradually when banks borrow more.

The BoE said it expected to charge banks an interest rate of 0.2-0.4 percentage points above its Bank Rate if they used the least liquid type of collateral to borrow from the ILTR, depending on demand.

For banks providing the highest-quality collateral, the minimum spread over Bank Rate to borrow from the ILTR would rise from zero to 0.03 percentage points, starting in November.

($1 = 0.7427 pounds)

(Reporting by Essi Lehto, writing by David Milliken, editing by Sarah Young and Barbara Lewis)