(Adds detail from report)
By David Milliken
LONDON, March 3 (Reuters) - Central banks need to
improve their tools for curbing instability in financial markets
after the global bond market turmoil at the start of the
COVID-19 pandemic and a repeat in Britain last year, a senior
Bank of England official said on Friday.
The central bank bought 19 billion pounds ($23 billion) of
government debt in an emergency move in September and October
after former prime minister Liz Truss's tax cut plans triggered
record falls in bond prices, threatening pension funds.
Andrew Hauser, the BoE's executive director for markets,
said a broader public agreement was needed on how much financial
instability was acceptable, what elements financial institutions
should be expected to insure against, and in what cases it was
better for central banks to step in.
"Without clearer guide rails of this kind, we are destined
to proceed somewhat messily from crisis to crisis, building a
framework by circumstance rather than by design," Hauser said,
in remarks to be delivered on Friday at the University of
Chicago Booth School of Business.
Last month, the BoE promised tougher rules for
liability-driven investment (LDI) funds used by pension funds,
which were at the heart of last year's turmoil. But the rules
could put LDI funds out of reach for smaller pension funds, the
BoE warned.
Regulators also needed to decide whether it was better to
buy distressed assets and then sell them back - as the BoE did
last year - or to borrow and lend securities to help firms in
trouble, Hauser said.
"Most of us share the instinct that lending tools are the
right place to start - but progress on defining the set of
non-bank firms that are needed, able and appropriately
incentivised to participate has so far been limited," he said.
Hauser said it would be preferable for central banks to
offer permanent standing facilities, rather than expecting
financial institutions to guess if and when there would be
official intervention during a crisis.
However, finding an appropriate design that would work
during future crises would be hard.
"Standing facilities that are calibrated either too vaguely
to shape ex ante behaviours, or too specifically to be able to
flex in response to events, are unlikely to be of lasting
value," he said.
($1 = 0.8335 pounds)
(Reporting by David Milliken
Editing by William Schomberg and Sharon Singleton)
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