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

Selected Issues Papers, July 13, 2023

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

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Bibliographic details

• Authors: Ruo Chen, Esti Kemp
• Published: July 13, 2023
• Series: Selected Issues Papers
• DOI: https://doi.org/10.5089/9798400248108.018

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.
• The paper identifies the key reasons for the success of the BoE’s intervention.
• The paper 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.

Key findings and themes

• Focus on gilt market turmoil that prompted BoE temporary gilt purchases in late September/early October 2022.
• Identification of factors that amplified market stress and the mechanisms through which those factors operated.
• Analysis of why the BoE intervention succeeded in restoring orderly market conditions and providing time for LDI funds to rebuild capital positions.
• Discussion of monitoring and supervisory gaps in the broader NBFI sector relevant for financial stability.

Reasons for the success of the BoE’s intervention

• Temporary gilt purchases on financial stability grounds restored orderly market conditions.
• The intervention allowed Liability Driven Investment (LDI) funds time to build their capital positions.

Gaps and policy issues highlighted

• Need for improved monitoring of financial stability risks in the broader NBFI sector at both:
  • individual jurisdiction level, and
  • international standard-setting body level.
• Policy issues related to surveillance, liquidity management, market intelligence, and the interaction between central bank backstops and NBFI vulnerabilities.

Subjects and keywords (as presented)

• Subjects: Asset and liability management, Expenditure, Financial institutions, Financial sector policy and analysis, Financial sector risk, Financial sector stability, International organization, Liquidity, Monetary policy, Nonbank financial institutions, Pension spending
• Keywords: Bank of England financial stability intervention, BoE intervention, central bank liquidity backstops, Defined benefit pension funds, Esti kemp, Financial sector risk, Financial sector stability, financial stability, gilt market turmoil, Global, LDI fund, LDI strategy, liability driven investment, Liquidity, liquidity management, market intelligence, NBFI sector, NBFI surveillance, NBFIs, Nonbank financial institutions, Pension spending, United Kingdom's liability

Content in this bundle

• Market stress centered on Liability-Driven Investment
  • Market stress centered on Liability-Driven Investment (Markdown version)
  • Market stress centered on Liability-Driven Investment (PDF)