Page 1  The building blocks of resilience - speech by Sarah Breeden Given at Westminster Business Forum policy conference  Page 2  Published on 16 June 2023  Following the Financial Policy Committee's recommendations, Sarah Breeden sets out the steps being taken to build resilience within Liability Driven Investment funds. She then looks at other vulnerabilities within non-bank financial institutions and how the LDI framework could be applied to build resilience within these firms. Speech Pension funds have an enormous responsibility in ensuring that pension obligations are honoured while also playing a vital role in facilitating the flow of savings into investment, including funding productive finance[1] and climate resilience. [2] And they are key players in the gilt market which is vital to the functioning of sterling financial markets more broadly. On all these grounds, pension fund resilience is a key financial stability issue, which will be the topic of my speech today. I suspect I don’t need to remind this audience of what happened last autumn. You will all remember how poorly managed leverage[3] at some liability-driven investment (LDI) funds[4] amplified a sudden repricing of assets following the Government’s growth plan, creating a self-reinforcing price spiral in the long-end of the gilt market. The Bank of England (Bank) then undertook a targeted intervention in the gilt market in order to deliver our financial stability objective, buying time for LDI funds to build their resilience. [5] Even that brief reminder may have been enough to send hearts racing.

Such frameworks would allow market participants to be better prepared for shocks while allowing regulators and financial stability authorities to be more transparent about our expectations. Whether these frameworks address vulnerabilities from leverage, liquidity mismatch, or liquidity demands from margin calls, they can draw on the building blocks we have used to calibrate LDI resilience. Non-bank frameworks should capture both systemic and idiosyncratic risks. They should account for risks specific to individual participants. In calibration they should draw on the tails of distributions, which include system wide stresses, to calibrate resilience. The timeframes the calibrations are drawn from should consider the options and incentives for raising additional liquidity that are in place, and operational processes should be improved to ensure this additional liquidity can be supplied. Non-banks should not have any impediments to drawing down on their liquidity during stress. Given a suitable framework for addressing non-bank vulnerabilities, the question for financial  Page 7  stability authorities, regulators, and participants, is where should these frameworks be applied? Phrased another way, what activities and which markets are systemic? Some non-bank regulatory frameworks are already being built. UK authorities issued a discussion paper on Money Market Funds (MMFs) last year. [23] And ahead of a consultation paper to be released later this year, the FPC judged that MMFs should be able to withstand severe but plausible levels of investor outflows without amplifying stress and increasing risks to financial stability by holding more liquid assets.