The lessons of the financial market fallout in autumn 2022, which led to the demise of the government of then Prime Minister Liz Truss, are still reverberating with UK monetary policy-makers. Dave Ramsden, deputy governor for banking and markets at the Bank of England, explained in a talk at OMFIF on 9 December how the Bank was building resilience against the risk of volatility stemming from financial risk-taking by non-banking institutions.
In a wide-ranging speech, Ramsden set down a number of initiatives the Bank is taking to guard against financial instability. This involves bringing in the Bank’s balance sheet to reinforce eligible non-banking institutions that get caught up in a ‘non-bank liquidity episode’.
Ramsden, who is in charge of the Bank’s balance sheet, said the lack of bank failures or bouts of severe market dysfunction in 2024 – despite turbulent political events – did not make him complacent. He quoted economist Hyman Minsky, ‘stability breeds instability’, and pointed out that ‘comparatively calmer market conditions could lead to greater risk-taking in future’.
Britain’s government bond market was the focus of financial unrest in September-October 2022 triggered by the Truss government’s unfunded tax cuts. It was exacerbated by the structure of liability-driven derivative instruments assembled by pension funds. The gilts market is now functioning in an orderly manner, Ramsden said. But he is paying careful attention to vulnerabilities caused by hedge fund leverage and concentration of market participants in certain sectors.
He confirmed that hedge funds are not eligible, unlike other financial firms outside the banking system, for access to Bank funding under new instruments it is assembling in case of crisis.
Ramsden suggested that evidence was growing of ‘structural changes consistent with a new tendency to volatility in financial markets and the wider system’. He quoted Nikhil Rathi, chief executive of the UK Financial Conduct Authority, who has described this development as ‘predictable volatility’.
As Ramsden put it: ‘Developments in technology alongside greater market concentration and interconnectedness mean we are more likely to see large swings in prices, particularly intraday, as markets can react faster to information and are more prone to herding behaviour.’
Watch Dave Ramsden in conversation on ‘Financial stability and the Bank of England’s toolkit’.
