A crisis of collateral.
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1. The Bank of England has signaled privately to bankers that it could extend its emergency bond-buying program past this Friday’s deadline, according to people briefed on the discussions, even as Governor Andrew Bailey warned pension funds that they “have three days left” before the support ends. Bailey’s comments late on Tuesday came as pension funds raced to shore up their derivative strategies before Friday’s “cliff edge”. The industry has said it needs more time to avoid a repeat of the forced selling that prompted the BoE to launch the emergency support scheme. Several bankers who have been briefed by the BoE said officials are watching whether so-called liability-driven investment managers, which help pension funds manage risks in their portfolios, have been able to build up enough cash reserves to enable their clients to meet margin calls. (Source: ft.com)
Think of what is happening in the UK as a crisis of collateral. Collateral is the currency of modern central banking and finance. If a central bank switches from QE to QT, it causes dramatic shifts to the value of bonds, and indirectly shifts many financial relationships that use bonds as collateral.
What we fear is happening is that central banks have become subject to financial dominance, a situation in which they cannot fulfill their inflation objective due to financial stability concerns. The Bank of England essentially faces a choice of burning the house down with a blowtorch in pursuit of its legally-mandated inflation target or bailing out the pensions industry. We assumed they would do the latter. This is the Bank of England after all. But Bailey told us yesterday that he, too, is not for turning. (Source: eurointelligence.com, 12 October 2022, italics mine)
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