BoE urges lenders to prevent repeat of pensions market turmoil

The Bank of England is pushing lenders to do more to prevent a repeat of the pension funds crisis in September, unleashed after the former chancellor Kwasi Kwarteng unveiled his tax-cutting “mini” Budget.

The fiscal plan, delivered on September 23 and subsequently ripped up by new chancellor Jeremy Hunt, triggered a sharp fall in UK government bond prices and a wave of cash calls for pension funds that had been using derivatives to manage their risk.

In the wake of the announcement, banks helped to ease the market turmoil by working with the BoE to channel liquidity to pension funds that needed it to prop up their investment strategies.

But Sarah Breeden, BoE executive director for financial stability, told a financial conference in London on Monday that even though banks themselves were not endangered by the recent bond market crisis, they should do more to prevent instability in other parts of 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 said global finance watchdogs also had a role to play in reducing the risk from non-bank financial institutions, a category that spans 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, chair of the Financial Conduct Authority watchdog, told a Treasury select committee on Monday that the pensions crisis had also raised questions about the nature of cross-border fund operations.

While pension funds and their advisers are typically based in the UK, the investments that ran into difficulty were largely 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.