Bank of England says some banks not applying lessons from gilts turmoil

The Bank of England (BoE) said on Thursday it was disappointing that some of the banks it regulates have not tackled shortcomings in how they manage risks from customers after turmoil in UK government bond markets last September.

The BoE’s Prudential (LON:PRU) Regulation Authority published the outcome of its “thematic review” into fixed income financing, also known as matched book repurchase agreements.

“In this review we found a number of shortcomings in firms’ counterparty risk management processes and margining arrangements that should be remediated,” the BoE said in a statement.

“Some of our observations are drawn directly from the lessons learned from the gilt market stress event, but others are broader themes, derived from our review of global activities within this business area.”

Yields on UK government bonds rocketed last September after the government of then Prime Minister Liz Truss set out a package of unfunded tax cuts, spooking markets and forcing the BoE to intervene to stabilise gilts.

The BoE said it had already told banks in December 2021 to review their secured financing businesses.

“However, as demonstrated by firms’ experiences during the 2022 gilt market stress event involving LDI (liability driven investment) funds, there is still some way to go in applying these lessons to fixed income financing businesses,” the BoE said.

“It is disappointing that the messages we communicated previously have not been fully addressed.”

In a letter to chief risk officers of banks on Thursday, the BoE said remediation should be “fully scoped, with agreed timelines that address any weaknesses on a timely and systematic basis”.

The BoE said it would follow up on individual firms’ responses.