Lessons from the United Kingdom’s Liability – Driven Investment (LDI) Crisis: United Kingdom

Author: Ms. Ruo Chen and Esti Kemp

Volume/Issue: Volume 2023 Issue 049

Publication date: July 2023

ISBN: 9798400248108

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Topics covered in this book

This title contains information about the following subjects. Click on a subject if you would like to see other titles with the same subjects.

International - Economics , Finance , Money and Monetary Policy , Public Finance , Defined benefit pension funds , liability driven investment , NBFIs , Bank of England financial stability intervention , liquidity management , central bank liquidity backstops , NBFI surveillance , financial stability , Esti kemp , gilt market turmoil , United Kingdom's liability , LDI fund , NBFI sector , LDI strategy , BoE intervention , market intelligence , Pension spending , Nonbank financial institutions , Financial sector stability , Financial sector risk , Liquidity , Global

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Summary

This paper seeks a deeper understanding of the factors that amplified the gilt market turmoil, which ultimately led the Bank of England (BoE) to undertake temporary gilt purchases on financial stability grounds in late September/early October 2022 to restore orderly market conditions and allow Liability Driven Investment (LDI) funds some time to build their capital positions. This paper identifies the key reasons for the success of the BoE’s intervention. This paper also discusses key gaps and policy issues related to monitoring financial stability risks in the broader NBFI sector for individual jurisdictions and international standard-setting bodies.