As the tide turns into a long period of low interest rates, no one can predict with certainty where the next wave of financial market turmoil will emerge. And that “hope for the unexpected” raises unsettling questions about modern financial law.
One is how much responsibility do the executives bear for the fallout from the real deal? Another, if they have some role, do they have to do a lot to fulfill that?
The recent turmoil in the UK pension and debt markets does not bode well for what may lie ahead for the markets and financial system.
This news led to an emergency response from the Bank of England that began with what was rightly described as “unprecedented” actions on inflation after the scandalous story of former governor Kwasi Kwarteng. The 30-year gilt yield changed to 1.6 percent percent in a few days, a move not seen before.
As avid followers of the financial sector know, stress tests are at the heart of the complex financial crisis that emerged after the financial crisis.
The general idea is that you think of an example of a doomsday like a drop in house prices, then see how it affects your banks, insurance companies or anything else you want to emphasize. If they are going to be short on capital, operating capacity or anything else, you, the director, order them to fill the gap. available.
Tests should be negative, but also valid. The planning of experiments is more of an experiment than a science but one thing is certain – no matter what order comes, the unexpected cannot be expected. It is like an unprecedented change in gold prices.
The Bank of England, which has responsibility for the stability of the UK’s finances, emphasized the test of Liability Driven Investment guidelines that were at the heart of the recent pension problems, back in 2018. 1 percent Rapid interest rate increases on all currencies and maturities. The actual movement in gilts was greater, and thus, the system was broken.
Recent tests may not help. As the deputy governor of the Bank of England Jon Cunliffe wrote in a recent letter to the UK Treasury select committee: “The scale and speed of the inflation rate until Wednesday 28 September is far ahead of history, and therefore the weather is more likely to be part of emergency control measures or mandatory testing. trouble.”
Special items, one, stress test, no.
That informational statement – a stress test is only as strong as the stress it thinks – is just one of the weaknesses of the 2018 work. The LDI stress test also failed to visualize the type of behavior that would cause the stock market to fall sharply, prompting fund managers to sell before it did. from the worst of depression. And it hasn’t caught the performance problems that are exacerbating the situation, making the case for the BoE to step into a car.
The UK Pension Regulator, the Bank of England and the Financial Conduct Authority are all currently working with pension funds to ensure that they have buffers that allow them to cope with a bigger change in interest rates than expected. which we saw. But what if there is something more than that?
Andreas Dombret, who was on the Bundesbank and ECB supervisory boards from 2010 to 2018, said that to really protect a system against future risks, “you have to do a lot of thinking creativity .
An official at the central bank of the Eurozone agrees that “much needs to be done about the limits of the model”. It is still a work in progress.
Regulators are devising ways to improve crash testing so they can better prepare for “Black Swan” incidents like four Britain’s recent financial crisis. It requires a new way of thinking about the world and its dangers. It also requires better information on the important aspects of the use of money markets, hedge funds and others that are widely defined in the world as “shadow banking”.
The first fruits of their efforts will emerge in the coming months. History will ultimately judge whether it is enough.