07 February 2018
Reporter: Drew Nicol

Central banks returning to securities lending, says BNY Mellon survey

Growing interest in securities financing from traditionally ‘buy-and-hold’ investment institutions is being driven by a more thorough search for yield in a low-rate, low-returns investment climate encourages, along with regulatory demands for liquidity, according to a BNY Mellon survey.

Currently, a third of central banks are involvement in securities lending activity, with an additional small percentage expressing interest or acknowledging pressure to start or increase programmes.

Of the central banks that engage in lending, the majority do so on a bilateral basis in the repo market with a preference for a conservative collateral set.

Some 61 percent of the central banks’ respondents confirmed that they actively participate in the repo markets, while 39 percent of them invest in time deposits. There is also some overlap between the two groups.

In its report on the industry survey, BNY Mellon stated: “Although some central banks can be regarded as champions of securities lending, particularly among those with a large pool of lendable securities, approaches to the market are as varied as the central banking sector itself.”

BNY Mellon noted that central banks’ quantitative easing programmes may be a primary factor in their return to the lending space.

The programmes have seen European and other central banks support asset prices by purchasing debt securities, including investment-grade bonds, then recycling them to the market through securities lending programmes.

Revenues available from lending securities are also becoming more attractive as other earnings decline, according to the report, which was conducted in the collaboration of University of Cambridge, Judge Business School.

The report highlighted that central banks, alongside other long-term investors, limited their activity levels in the aftermath of the financial crisis, first due to the impact of restrictions on short-selling and then in response to reduced demand from borrowers.

Post-crisis regulatory demands for collateral and margin requirements are also playing a part in the renewed interest in securities lending, according to survey respondents.

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