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Home Finance BoE Financial Stability Report: Liquidity lessons need to be learned in aftermath of LDI crisis

BoE Financial Stability Report: Liquidity lessons need to be learned in aftermath of LDI crisis

by Staff GBAF Publications Ltd


  • The Bank of England’s report looks at the pension industry’s response to the liability driven investment (LDI) crisis.
  • Over a four-day period from 21 September 2022 30-year gilt yields rose140 basis points.
  • This was more than twice as big as the largest move since 2000 – well beyond historical norms. 
  • This prompted increased collateral calls forcing some schemes to sell assets, particularly gilts.
  • The report says response to the crisis was slowed by firms’ operational arrangements, and in some cases by the governance processes at pension schemes.
  • The Bank’s Financial Policy Committee (FPC) believes LDI funds should “maintain financial and operational resilience to withstand severe but plausible market moves, including those experienced during the recent period of volatility.”
  • Recommends further steps be taken to improve governance and regulatory gaps. 

The Bank of England has published its Financial Stability Report Financial Stability Report – December 2022 | Bank of England

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown:

“The LDI sector has been through a bruising time as rapidly rising gilt yields in the aftermath of the mini-Budget prompted a surge in collateral calls that some schemes struggled to manage. The majority of schemes navigated the situation well but those caught in the storm endured a truly torrid time. The bank’s asset purchase scheme stabilised the market, but it’s clear that considerable risks remain.

The Bank’s Financial Stability Report lifts the lid on what happened during that time and the lessons that need to be learned. Previous stress tests conducted by the FPC in 2018 modelled 100bps point moves in gilt yields – well below the 140bps shifts that happened over a four-day period in September. When looking at measuring resilience the range of scenarios will need to be widened and liquidity requirements increased accordingly.

The Bank’s report also highlights real gaps in how schemes and their managers responded to the crisis- many simply weren’t able to respond to the situation quickly enough and important governance lessons need to be learned. Looking ahead schemes will need to prepare to hold more liquidity and react more quickly to changing conditions – smaller schemes, in particular, may need to ask themselves some hard questions on whether these strategies remain appropriate for them in the future. “