Good intentions in risk management and the LDI crisis
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.
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Author's Biography
Martin Walker is Head of Product for Securities and Finance and Collateral Management at Broadridge. Previous roles included Global Head of Securities Finance and Treasury IT at Dresdner Bank and Global Head of Prime Brokerage Technology at Royal Bank of Scotland (RBS). He learned first-hand about financial crises during the dotcom crash and the great financial crisis. He is the author of a book on capital markets' infrastructure, as well as several papers and numerous articles.
Citation
Walker, Martin (2023, June 1). Good intentions in risk management and the LDI crisis. In the Journal of Risk Management in Financial Institutions, Volume 16, Issue 3. https://doi.org/10.69554/QFHM6159.
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