On 4 June, Andrew Hauser, Executive Director – Markets at BoE, made a speech on Covid-19, financial markets and the Bank of England’s balance sheet operations.
In his speech, Mr Hauser outlines the unprecedented package of measures that were taken by the BoE and HM Treasury to respond to the economic consequences of the pandemic. He describes the steps taken to neutralise the pre-lockdown “dash for cash” as the biggest test of core market functioning and resilience since the financial crisis of 2008-9.
Mr Hauser then addresses the broader aspects of the Covid-19 crisis – medical, social, economic, and personal – remain hugely challenging, and involve a much wider set of actors than central banks alone. He says that further financial instability cannot be ruled out, and the sheer scale of the balance sheet interventions necessary in recent months pose important longer term questions. The four questions Mr Hauser identifies relate to:
- Understanding why intermediaries struggled to make effective markets in core government bond, money and foreign exchange instruments at crucial moments during the crisis. He asks whether it was simply the sheer scale of the shock, combined with the operational challenges of remote working, or whether regulatory constraints also plaid a role. If there are circumstances where our traditional counterparties aren’t able to intermediate, he queries whether that needs to be fixed at source, or whether central banks need to change the design of their balance sheet facilities more profoundly to fill that gap.
- the central role played by highly-leveraged but thinly-capitalised non-banks in arbitraging between key financial markets, if the unwinding of those trades can amplify instability.
- Dealing with the risks posed to financial stability by the structural tendency for Money Market and some other open-ended funds to be prone to runs, without having to commit scarce public money to costly support facilities.
- Ensuring timely transition away from LIBOR.
BoE’s Financial Policy Committee will be reflecting on these and other issues in the months ahead.