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Bank of England intervenes in bond markets again, warns of ‘material risk’ to UK financial stability

October 11, 2022

  • “Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability,” the Bank of England warned.
  • The move marks the second expansion of the central bank’s extraordinary rescue package in as many days, after it increased the limit for its daily gilt purchases on Monday ahead of the planned end of the purchase scheme.
The Bank of England raised rates by 0.5 percentage points Thursday.
The Bank of England raised rates by 0.5 percentage points Thursday.
Vuk Valcic | SOPA Images | LightRocket | Getty Images

LONDON — The Bank of England on Tuesday announced an expansion of its emergency bond-buying operation as it looks to restore order to the country’s chaotic bond market.

The central bank said it will widen its purchases of U.K. government bonds — known as gilts — to include index-linked gilts from Oct. 11 until Oct. 14. Index-linked gilts are bonds where payouts to bondholders are benchmarked in line with the U.K. retail price index.

The move marks the second expansion of the Bank’s extraordinary rescue package in as many days, after it increased the limit for its daily gilt purchases on Monday ahead of the planned end of the purchase scheme on Friday.

The Bank launched its emergency intervention on Sep. 28 after an unprecedented sell-off in long-dated U.K. government bonds threatened to collapse multiple liability driven investment (LDI) funds, widely held by U.K. pension schemes.

“The beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts. Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability,” the bank said in a statement Tuesday.

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Nassim Nicholas Taleb on the Real Financial Risks of 2016

January 3, 2016

PHOTO: GETTY IMAGES

Nassim Nicholas Taleb on the Real Financial Risks of 2016

Worry less about the banking system, but commodities, epidemics and climate volatility could be trouble

How should we think about financial risks in 2016?

First, worry less about the banking system. Financial institutions today are less fragile than they were a few years ago. This isn’t because they got better at understanding risk (they didn’t) but because, since 2009, banks have been shedding their exposures to extreme events. Hedge funds, which are much more adept at risk-taking, now function as reinsurers of sorts. Because hedge-fund owners have skin in the game, they are less prone to hiding risks than are bankers.

This isn’t to say that the financial system has healed: Monetary policy made itself ineffective with low interest rates, which were seen as a cure rather than a transitory painkiller. Zero interest rates turn monetary policy into a massive weapon that has no ammunition. There’s no evidence that “zero” interest rates are better than, say, 2% or 3%, as the Federal Reserve may be realizing.

I worry about asset values that have swelled in response to easy money. Low interest rates invite speculation in assets such as junk bonds, real estate and emerging market securities. The effect of tightening in 1994 was disproportionately felt with Italian, Mexican and Thai securities. The rule is: Investments with micro-Ponzi attributes (i.e., a need to borrow to repay) will be hit.

Though “another Lehman Brothers” isn’t likely to happen with banks, it is very likely to happen with commodity firms and countries that depend directly or indirectly on commodity prices. Dubai is more threatened by oil prices than Islamic State. Commodity people have been shouting, “We’ve hit bottom,” which leads me to believe that they still have inventory to liquidate.

…click on the above link to read the rest of the article…

Worries Build Among Investors Over Oil and Gas Industry’s Exposure to Water and Climate Risks

October 27, 2015

Worries Build Among Investors Over Oil and Gas Industry’s Exposure to Water and Climate Risks

When it comes to financial risks surrounding water, there is one industry that, according to a new report, is both among the most exposed to these risks and the least transparent to investors about them: the oil and gas industry.

This year, 1,073 of the world’s largest publicly listed companies faced requests from institutional investors concerned about the companies’ vulnerability to water-related risks that they disclose their plans for adapting and responding to issues like drought or water shortages.

Many of those companies responded by reporting their information to a group called CDP, which works with over 800 institutional investors with assets of US$95 trillion to push for corporate transparency. But in the oil and gas industry, the compliance rate was just over half the average, with only 22% of companies providing information, CDP reported.

That’s a concern for investors, CDP wrote, because their data showed that roughly two thirds of oil and gas companies say they are vulnerable to water risks — and those risks are not just speculative risks to keep an eye on for some future time.

Nearly half of the oil and gas companies who responded report that their bottom line has already suffered due to “water-related challenges” over the past year, placing the industry in the ranks of the most vulnerable, the CDP reported.

“Just as oil was to the 20th century, water is fast becoming the defining resource of the 21st century,” said Cate Lamb, head of water at CDP. “Unfortunately however, unlike oil, there is no replacement for water.”

The growing risks of unaddressed climate change are beginning to draw the attention of the financial community, with investors, central bankers and global economic institutions increasingly questioning what impacts shifting weather patterns might have on business as we know it.

…click on the above link to read the rest of the article…

The Central Problem with Central Banks: They Become the Greater Fools/Bag-Holders

May 13, 2015

The Central Problem with Central Banks: They Become the Greater Fools/Bag-Holders 

Those who are confident the central banks can print unlimited money may find there are political and financial consequences to such extremes that cannot be foreseen.

The central problem with central banks is their mandate now includes propping up all asset markets globally. Back in the good old days before the Global Financial Meltdown of 2008-09, central bankers reckoned they could control the “animal spirits” released when the risk-on herd destabilized into a chaotic risk-off stampede.

As former Federal Reserve chairman Alan Greenspan noted in his 2014 Foreign Affairsarticle Why I Didn’t See the Crisis Coming, the models used by central banks and private economists alike presumed the demand for risk-on assets would remain robust even in a downturn:

Almost all market participants were aware of the growing risks, but they also knew that a bubble could keep expanding for years. Financial firms thus feared that should they retrench too soon, they would almost surely lose market share, perhaps irretrievably. In July 2007, the chair and CEO of Citigroup, Charles Prince, expressed that fear in a now-famous remark: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

Financial firms accepted the risk that they would be unable to anticipate the onset of a crisis in time to retrench. However, they thought the risk was limited, believing that even if a crisis developed, the seemingly insatiable demand for exotic financial products would dissipate only slowly, allowing them to sell almost all their portfolios without loss.

…click on the above link to read the rest of the article…

 

 

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