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Good intentions in risk management and the LDI crisis

Author

Listed:
  • Walker, Martin

    (Head of Product, Securities Finance and Collateral Management, Broadridge, UK)

Abstract

This paper describes the part played by repo trading, collateral management and liability driven investment (LDI) strategies (each of which was designed to improve the management of risk) in amplifying the crash in gilt prices following the 23rd September, 2022 UK mini-budget. This was a crisis that ultimately led to the resignations of the British Prime Minister and Chancellor of Exchequer as well as the announcement by the Bank of England of a willingness to spend up to £65bn intervening in the gilt market.1 It argues that neither the government nor the LDI funds were solely responsible for the crash and that the fragilities in the UK financial system had gradually built up over a number of decades. It also looks at the lessons that could potentially be learned by financial institutions using repo trading or collateral management as well as the potential lessons for policy makers in government and regulatory bodies.

Suggested Citation

  • Walker, Martin, 2023. "Good intentions in risk management and the LDI crisis," Journal of Risk Management in Financial Institutions, Henry Stewart Publications, vol. 16(3), pages 228-236, June.
    • Handle: RePEc:aza:rmfi00:y:2023:v:16:i:3:p:228-236
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    More about this item

    Keywords

    liability driven investment; repo; collateral management; credit risk; gilts; trade reporting; European Market Infrastructure Regulation (EMIR); Securities Financing Transactions Regulation (SFTR); market risk;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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