BofE deputy governor highlights “liquidity stress” in UK financial ecosystem

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In an address at the European Systemic Risk Board (ESRB) yesterday, deputy governor of the Bank of England, Dave Ramsden, said the “intricate relationship” between interest rate risk and liquidity risk underscores the need for effective risk management by financial institutions.

Ramsden also addressed the timeliness of his speech, emphasising the market’s expectation of prolonged higher interest rates compared to the post-global financial crisis and pre-pandemic era. He pointed out that changes in market perceptions of the equilibrium real interest rate and increased uncertainty around economic outlooks contribute to the current landscape.

“The implications of unchecked exposure to interest rate risk poses potential risks – particularly to non-bank financial institutions such as pension funds and asset managers,” Ramsden said.

Ramsden affirmed the Bank of England’s proactive stance in addressing these vulnerabilities through national and international initiatives, strengthening resilience in non-bank market participants, and developing backstop facilities.

In response to the speech, Jo Burnham, risk and margin SME at derivatives analytics firm OpenGamma said: “The inflation era and interest rate hikes have significantly increased the cost of funding for many non-bank financial institutions. As a result, numerous factors have emerged that have made it harder to source the collateral needed to cover margin requirements. It’s all very well and good having a leveraged investment strategy, but non-bank financial institutions need to manage the inherent risks more dynamically is now a non-negotiable requirement.”

Joseph Cordahi, investment management strategy director at NeoXam, said: “When it comes to liquidity risk, non-bank financial institutions have never been held to the same standards as the banks, in spite of their increasingly integral role in the effective functioning of global markets.”

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