BoE urges lenders to prevent repeat of pensions market turmoil

The Bank of England is urging lenders to do more to avoid a repeat of September’s pension funds crisis. This was after Kwasi Kwarteng, the former chancellor of South Africa, revealed his plans to reopen the bank. tax-cutting “mini” Budget.

The fiscal plan, which was presented on September 23 and followed up ripped up by new chancellor Jeremy Hunt, triggered by sharp fall in UK government bond prices The wave of cash calls came for pension funds that were using derivatives as a way to manage their risk.

Banks reacted to the announcement by working with the BoE and distributing liquidity to pension funds in need of it.

Sarah Breeden, the BoE’s executive director for financial stability, said Monday at a London financial conference that although banks were not directly affected by the bond market crisis, they needed to do more to prevent instability elsewhere in the financial sector.

“Banks have an important role to play in reducing risks both to themselves and to the wider system from non-bank leverage,” she said, adding that lenders should demand more information on the underlying financial picture of the funds they deal with in order to conduct better risk assessments.

“Further progress on both these fronts is needed if we are to be confident the counterparty channel is fully managed,” Breeden added, citing the 2021 implosion of hedge fund Archegos, and the $10bn of counterparty credit losses it heaped on banks, as evidence of the problems around banks’ assessments of financial counterparty risk.

Breeden stated that global finance watchdogs could also play a role in reducing risk from non-bank financial institution, which includes everything from hedge funds to insurance companies.

“The UK’s recent experience is a timely reminder of the risks here,” she said, urging greater sharing of data internationally that would enable supervisors to identify risks on their patch more clearly.

Separately Richard Lloyd, chairman of the Financial Conduct Authority watcheddog, stated Monday to a Treasury Select Committee that the pensions crisis had also raised concerns about the nature cross-border fund operations.

Although most pension funds and their advisers have offices in the UK (as is the majority of investment advisors), the problems that caused them to fail were mostly based in Ireland and Luxembourg.

“There are asset managers based in other parts of Europe where we were reliant on the regulator in that country to give us the data to be able to respond [to the crisis],” Lloyd said. “There are some quite big lessons there . . . about how we co-operate and work together internationally.”

FCA chief executive Nikhil Rathi told the committee that he hoped “progress” would be made on the issue of cross-border collaboration within the sector “in the coming days”, as the G20 heads of state prepare to meet next week in Jakarta.