Bank of England (BoE) Gives December Deadline To Lenders For Improving Risk
The Bank of England (BoE) has decided to give more time to the lenders to improve their risk scores. According to the reports, the central bank will decide by the end of the year whether it needs to introduce tougher rules for the lender or not!
This development comes after the country saw an almost meltdown in its pension funds. When this incident occurred in September 2022, it highlighted how there are several loopholes in how the risks are quantified.
At the time, the banks had exposure to the LDI (Liability driven investment) funds. The LDI funds were used by the pension schemes to pay out the pensioners in the country.
However, the trouble started when these LDI funds had trouble completing their collateral calls after the UK bond yields crashed. According to experts, a major reason why the UK bonds crashed was the unfunded tax cuts announced by Liz Truss (Prime Minister).
At the time, no bank knew that they could be exposed to such a huge risk... But as they say, there are no guarantees of fixed profits in investing. Even if the risk is still low, we need to understand that it exists nonetheless!
No Risk Management
To mitigate the issue, the central bank intervened in the UK bonds market and bought the bonds. This eased the pressure from the LDI funds and stabilized the UK bonds markets.
However, this incident highlighted how fragile the UK banking and pension system is and what steps need to be taken!
According to experts, these events call for more highlighted supervision. But if we don't get that, the same situation could repeat in no time.
That's why the central bank has given more time for all parties to find and solve any weaknesses. And by the end of December 2023, the central bank will decide whether it needs to announce any changes or not!