Mark Carney has suggested that the Bank's enhanced balance sheet could be used to support ‘marked-based finance’ firms.
Last night, at the annual Mansion House dinner – which has been running since 1877 – Mark Carney (pictured), governor of the Bank of England, gave a speech entitled ‘New Economy, New Finance, New Bank’.
In it, he laid out the Bank’s plan for maintaining the City of London’s standing as the preeminent hub for finance and innovation. Support for fintech and alternative finance firms is to be a key part of that strategy.
Carney said that the economy is reorganising itself ‘into a series of distributed peer-to-peer connections across powerful networks’. He said that we are on the brink of a ‘fourth industrial revolution’, and that profound changes demand a new form of finance, which in turn demands ‘a new Bank’.
He announced a series of updates to the way the bank operates. Perhaps most notably, the Real Time Gross Settlement system (RTGS) – which he described as ‘the backbone of every payment in the UK’ – is being revamped, primarily to accommodate non-banks.
In time, private payment systems, including those using distributed ledger technology, will be able to plug into the system. Hammond said the plan is to open RTGS to a new generation of non payment service providers (PSPs).
The system is also being changed to lower the costs of cross-border payments, and it was revealed in the speech that two private PSPs joined the system earlier this year to help deliver this. If successful, there is scope to realise annual savings in the UK of over £600m.
Finally, the Bank will attempt to make it easier for firms to capitalise on the promise of big data. RTGS will soon capture ‘much richer data’ on every payment made.
Carney also spoke at length about updating rules and regulations to support new forms of finance. He referenced, for example, the fact that the Bank’s streamlined approach to authorising new banks has resulted in the authorisation of 37 banks since 2013. Of these, he noted that 16 are UK startups, and four are ‘internet-only’.
Towards the end of his speech, the Bank of England governor offered a tantalising lure to those working in the alternative finance sector. He said that ‘market-based finance’ has been responsible for almost all corporate credit growth since the financial crisis.
On seizing the full potential of market-based finance, he said: “In particular, it requires hard infrastructure like a robust Bank of England balance sheet that can support the banking system and the broader system of market-based finance.”
“The Bank’s new approach can be summarised in four words: we’re open for business. We now provide liquidity against a wider range of collateral, to a wider range of counterparties, for longer terms, and at lower fees than ever before. And we stand ready to provide liquidity in a range of foreign currencies if required.”
Carney then referenced the Bank of England’s latest capital injection – also announced yesterday at the Mansion House Dinner by Chancellor Phillip Hammond – which gives it an extra £500bn in lending capacity to support the UK economy. The governor said that the Bank now has a balance sheet that is ‘fit for purpose and the future’.
It is not entirely clear what the term ‘market-based finance’ refers to. However, this FCA article (published May 2016), would suggest that it encapsulates all things ‘non-bank’.
In March, at a Treasury Select Committee meeting, Funding Circle co-founder James Meekings called on government to make peer-to-peer loans Central Bank eligible. His hope is that Funding Circle’s investors (specifically major banks) will eventually be able to sell their loans to the Bank of England.
In the past, the Bank of England has attempted various ‘repo schemes’, including Funding for Lending (now named the Term Funding Scheme). Funding taken by banks from these schemes cannot, at present, be used to fund loans via the Funding Circle marketplace, or through any other P2P/marketplace platform. Meekings’ plan is to change that.
Though details are lacking, Carney’s core message – that the Bank is ‘open for business’ – will be seen as a positive sign for alternative finance providers.
Now in its sixth year, the AltFi London Summit returns on 18th March 2019 to 155 Bishopsgate. Last year proved to be a crucial turning point for the key players building the future of finance. Leading platforms launched oversubscribed IPOs, digital banks proliferated and mainstream financial institutions started their own disruptive propositions. With 2019 certain to be another landmark year, more questions will be asked by regulators with investor interest in disruption also poised for more rapid growth.