trends we identified in our bis work : first, the growing use of ldi [ 6 ] increased the exposure of real people, in this case current and prospective uk pensioners, to developments in gilt markets. second, key features of ldi funds left them, and their defined benefit ( db ) pension scheme investors, exposed to very substantial liquidity risks in the event of a sharp change in interest rates. those features were : large leveraged holdings of longer - duration gilts or interest rate derivatives ; liquidity buffers for meeting margin or collateral calls that had not been rigorously stress tested for more severe shocks ; and an overly cumbersome recapitalisation process that left db schemes unable to inject resources quickly enough into their ldi funds, even where they had the means to do so. third, in such circumstances, the ldis ’ business model was reliant on being able to liquidate their gilt holdings in size, and at stable well - defined prices. in markets where there was limited intermediation capacity and few if any other marginal buyers, that proved impossible. expressed like this, and abstracting from the very different initial trigger, these features bear a striking resemblance to the 2020 dash for cash. a wide range of non - bank players with leveraged positions and thin liquidity buffers all rushed simultaneously to get out of positions in normallyliquid financial instruments in order to raise funds for margin calls and other liquidity needs. that selling pressure overwhelmed the capacity ( or willingness ) of intermediaries to warehouse those instruments, leading to sharp and disorderly price declines in core assets relied upon, directly or indirectly, by households, firms and governments to support economic activity. and central banks ’ traditional tools, working through banks, were unable to direct liquidity to the source of the shock ( figure 1 ). european energy markets in spring 2022 saw similar dynamics too, when sharp price movements triggered by the invasion of ukraine triggered large margin requirements on energy derivative positions that thinly - capitalised intermediaries struggled to meet, driving liquidation of positions that further amplified the initial shock to energy prices. some may argue that covid, putin and the uk ’ s autumn 2022 fiscal announcements are truly exceptional shocks that would challenge any market structure, and are unlikely to be repeated. maybe. but the underlying vulnerabilities are real and growing, and hoping for calmer times is not a strategy. ldi was just the latest warning of the need

. and it makes determination of preferred overall insurance levels something of a random and history - dependent process. an alternative approach would be to map the vulnerabilities in non - banks more comprehensively, establishing a common baseline for the appropriate level of private insurance consistent with maintaining financial stability in normal times, and taking steps to achieve that baseline ahead of time. aspects of this work were undertaken by the financial stability board following the dash for cash, [ 10 ] and some reforms are now underway in various countries, including the uk. but the task is huge, and global in nature : the non - bank sector is highly diverse, and the work involves an unusually wide range of public bodies, both national and international, with varying remits. it is vital that this work continues with real vigour if we are to avoid either the scylla of costly public backstops becoming increasingly frequently used as frontstops, or – worse – the charybdis of households and firms having to bear the risks of systemic instability directly. 3 ) ensuring we have central bank tools that are effective to provide a credible backstop, central banks need : first, a well - defined framework for deciding when systemic stability is sufficiently threatened for intervention to be necessary ; and, second, a tool that is able to target the underlying market vulnerability. in the ldi case, the decision to intervene was made on the basis of a recommendation from our financial policy committee that uk financial stability was at risk from the development of a selfreinforcing price spiral affecting long - dated uk government debt. that judgment was informed by a dashboard of quantitative measures, starting with the sharp rise in long gilt yields, a blowout in bid / ask spreads and a material reduction in traded market depth. but these measures were not enough to trigger action. a sharp rise in yields for example might simply reflect economic developments. and they could not by themselves elucidate the underlying dynamics driving market pricing. it was only through direct contact with the ldi funds themselves, and broader market participants on both the buy - and sell - sides, that we could understand both the scale of the fire sales underway, and the prospective size, timing and composition of future transactions if yields continued to rise. market data were vital inputs to objective decision making – but they could not answer the ‘ whys ’ and ‘ what ifs ’ essential to effective tool design. key aspects of the intervention – including the range of assets we offered to purchase, the