IMF Working Papers

Putting Out the NBFIRE: Lessons from the UK's Liability-Driven Investment (LDI) Crisis

By Ruo Chen, Esti Kemp

September 29, 2023

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Ruo Chen, and Esti Kemp. Putting Out the NBFIRE: Lessons from the UK's Liability-Driven Investment (LDI) Crisis, (USA: International Monetary Fund, 2023) accessed December 12, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Liability Driven Investment (LDI) funds were at the center of the severe stress that emerged in the UK gilt market in the aftermath of the September 2022 UK "mini-budget". The episode, which came on the heels of the “Dash for Cash” and “Archegos” stress episodes in the previous two years, highlights underlying vulnerabilities in the large and diverse non-bank financial institution (NBFI) sector. 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 enable LDI funds to build their capital positions. With the gilt market stress and the BoE’s purchases now fully unwound, this paper identifies the key reasons for the success of the BoE’s intervention. Then, drawing also on findings of the 2022 UK Financial Sector Assessment Program (FSAP), the paper discusses key gaps and policy issues related to the monitoring of financial stability risks in the broader NBFI sector for both individual jurisdictions and international standard-setting bodies.

Subject: Asset and liability management, Expenditure, Financial institutions, Financial sector policy and analysis, Financial sector risk, Financial sector stability, Liquidity, Nonbank financial institutions, Pension spending

Keywords: Bank of England financial stability intervention, BoE's purchase, Central bank liquidity, Central bank liquidity backstops, Defined benefit pension funds, Europe, Financial sector risk, Financial sector stability, Financial stability, Gilt market turmoil, Global, LDI crisis, Liability driven investment, Liquidity, Liquidity management, NBFI sector, NBFI surveillance, NBFIs, Nonbank financial institutions, Pension spending

Publication Details

  • Pages:

    25

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2023/210

  • Stock No:

    WPIEA2023210

  • ISBN:

    9798400255076

  • ISSN:

    1018-5941