Bank of England calls for crackdown on money managers after mini-Budget pensions crisis

“Perhaps if their advisers had been more sensitive to dealing with levels of stress like this, some of that risk would have been managed more effectively,” he told the Treasury Select Committee.

The Bank of England was forced to buy £19bn of UK government bonds in late September and early October, after sharp moves in the gilt market left some pension funds facing collapse. A jump in borrowing costs in the wake of former chancellor Kwasi Kwarteng’s mini-Budget left many funds that used Liability Driven Investment (LDI) strategies struggling to meet huge cash calls.

The incident has led to greater scrutiny of how the shadow banking sector is regulated. It has ballooned in size since the 2008 financial crisis, as rules governing banking have tightened significantly.

Ms Breeden said more needed to be done to improve transparency across the non-banking sector, which is worth tens of trillions of dollars. A lack of transparency resulted in the collapse of Archegos Capital Management last year. The hedge fund had built up huge hidden leverage positions using derivatives that were only revealed when it collapsed. More than $100bn (£88bn) was wiped off the value of nearly a dozen companies as a result.

Market reforms could include forcing investors to hold more money to meet emergency cash calls, Ms Breeden said, which would help “ensure excessive leverage is better controlled by market pricing and margins”.  

Ms Breeden said the regulation of money managers needed to be closer to that of the banking sector, where stress tests force lenders to war game sharp falls in house prices to ensure they have enough capital to cover potential losses.

Last month, former prime minister Gordon Brown called for “eternal vigilance about what has happened to what is called the shadow banking sector”, warning that “there could be further crises to come”.

Separately, Bank of England chief economist Huw Pill said on Monday that a bigger tax raid by Jeremy Hunt in next week’s Autumn Statement could soften the interest rate blow facing households.

He said at a public Q&A session that raising taxes is “another way of dampening down on demand” and could lower the peak for interest rates as the Bank tries to rein in inflation running at a four decade high.

“We would set interest rates a little bit lower, we speed the economy up, we boost spending through monetary policy in order to offset that effect and we still ensure that inflation is back at 2pc,” he said, discussing a scenario where the Chancellor puts up taxes by more than the Bank expects.

Gloomy economic forecasts released by the Bank last week did not include assumptions about future fiscal policy as Mr Hunt tries to fill a £50bn-plus hole through tax rises and spending cuts.

The Bank will be able to respond to the announcements made by the Chancellor in the Budget on November 17 at its next scheduled meeting in December.

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2022-11-07 11:49:00

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