LONDON (Reuters) -Improving transparency of ‘non-banks’ such as pension funds is a first step in applying lessons from recent turmoil in Britain’s government bond market, Bank of England executive director Sarah Breeden said on Monday.
The central bank had to intervene in UK bond markets in September after the 1.6 trillion pound Liability Driven Investment funds (LDI) sector – used by pension funds to help ensure future payouts – struggled to meet collateral calls after the previous government’s tax cut plans triggered a gilt market rout.
It shone a light on the sprawling and less regulated ‘non-bank’ financial sector made up of pension funds, insurers and different types of investment funds.
Breeden said the LDI issues were a reminder of the “systemic risks” posed by poorly-managed leverage in the non-bank financial system where there is “all too often” excessive risk taking alongside improper liquidity risk management.
“Transparency is an important first step. That enables the necessary next step of ensuring non-banks’ positions and interlinkages with the rest of the financial system can be comprehensively stress-tested and understood in a system-wide manner,” Breeden told an event held by derivatives industry body ISDA and hedge fund sector body AIMA.
(Reporting by Huw JonesEditing by Gareth Jones and Toby Chopra)
