Bank of England lowers cost of on-demand liquidity facility

LONDON, March 27 (Reuters) - The Bank ​of England said on Friday it was lowering the cost for financial ​institutions ‌to access its on-demand liquidity support as it shifts away from lenders holding ⁠large interest-bearing reserves at the central bank.

The ⁠BoE is moving to ​what it calls a demand-driven system of reserves under which commercial banks use collateral such as government bonds to borrow cash from ​the ‌BoE and the central bank holds much less government debt than before.

Banks typically obtain sterling liquidity at weekly BoE repo operations for one-week and six-month funds.

Friday's change affects the Discount ​Window Facility, which offers funds for up to 30 days on ‌an on-demand basis against similar collateral to the main repo facilities.

"It is intended for Sterling ‌Monetary Framework participants who anticipate or experience a previously unexpected liquidity need, complementing our regular market-wide operations," the BoE said in a statement.

The ​BoE said the Discount Window Facility would charge a spread of 15 basis ‌points over Bank Rate for the highest-quality collateral, 25 bps for the middle grade and 50 bps for the lowest-quality assets, replacing ⁠a ⁠more complex charging system.

Unlike most other BoE ‌facilities, the Discount Window Facility also allows financial institutions to borrow British government bonds ​as well ​as BoE reserves.

The BoE operates separate facilities ‌that only come into effect during periods of market stress, or are designed for more urgent overnight borrowing needs. (Reporting by Sarah Young and David Milliken Editing by William Schomberg)