The Bank of England is going to decide by year’s end whether tougher disclosure rules will be needed for banks after an almost complete meltdown in funds related to pensions in September 2022. The bank projected weaknesses when it came to quantifying risks. It is well to be noted that the banks were exposed to funds that were liability-driven investments and were used by the pension schemes to make sure payouts for the pensioners.
The funds did struggle to meet collateral calls when the UK government bond prices they held crashed following the announcement of unfunded tax cuts, which was made by the then Prime Minister of the UK, Liz Truss. The Bank of England executive director, Victoria Saporta, told the Treasury Select Committee by the Parliament that the banks were not aware of the size of their exposures when it came to pension fund counterparties. She remarked that there wasn’t any counterparty risk management.
The BoE apparently had to buy the UK government bonds in order to make sure that the market is stabilised and thereby take the pressure off the LDI funds as well as pension schemes; however, the bank’s stability was not under any sort of threat. For the BoE in 2023, the priority lies in ensuring that the banks are able to quantify the exposures the way they should.
Saporta added that if the supervision is not sufficient, then in that case it will be thrown back to her, and that’s when they will have to make some regulations. If, in fact, there are still loopholes that are seen by year’s end, then they will have to increase the pressure and elevate the requirements in one particular area.
Apparently, the regulators have already gone on to force the LDI funds to hold more liquidity in order to cope with any bond price falls. It is expected later in March that the BoE’s financial policy committee will roll out a tougher framework so as to regulate the LDI funds for the long term. So as to be effective, a worldwide action may also need to be put in place given the fact that the funds happen to be listed across European Union centres like Dublin as well as Luxembourg.
