Andrew Hauser: Looking through a glass onion - lessons from the 2022 LDI intervention

Speech by Mr Andrew Hauser, Executive Director for Markets of the Bank of England, at the Chicago Booth Initiative on Global Markets' Workshop on Market Dysfunction, University of Chicago Booth School of Business, Chicago, Illinois, 3 March 2023. 

The views expressed in this speech are those of the speaker and not the view of the BIS.

Introduction

It was just over two years ago when Lorie Logan and I first sat down to map out a plan for a working group of the Bank for International Settlements (BIS) Markets Committee on tools for market dysfunction. A year earlier, central banks around the globe had been required to intervene, at pace and scale, to prevent the sudden 'dash for cash' that followed the announcement of Covid lockdowns from undermining monetary and financial stability. Those interventions worked, aided by the fact that the stance required to tackle market dysfunction was directionally aligned with that required to achieve monetary policy goals more broadly. Nevertheless, given the speed with which dysfunction appeared, many central banks had to innovate, using tools they had to hand, rather than those designed specifically for the purpose.

If the mayhem in financial markets in Spring 2020 had been a genuine one-off, that might have been the end of things. But what Lorie and I wanted to highlight was that, while Covid itself may have been truly exceptional, the financial market propagation mechanisms that turned that shock into a nascent systemic liquidity crisis reflected more structural trends: an increasing reliance by the real economy on core capital markets rather than banks; constraints on market intermediation capacity; and a range of unresolved vulnerabilities in non-bank firms that played an ever-growing role in those markets. In short, even if nothing as awful as Covid ever happened again, market dysfunction at a scale capable of threatening systemic stability could recur – and in all likelihood, would do so. And central banks needed to be ready to play their part.