Within the investment fund universe, we need to look at the related question of whether actual or prospective redemption requests generated additional pressures for funds invested in illiquid assets, how well liquidity management tools operated under stress and whether we saw any emergence of first mover advantages that could have created ‘run’ dynamics. One important element in the amplification of liquidity pressure appears to have been the unwinding of large positions in interest rate markets, particularly US Treasuries, by very highly leveraged hedge funds. These funds can help to stabilise market prices in normal times by arbitraging small differences that open up between the value of derivatives and the value of the cash instrument on which the derivative is based. In March, however, these highly leveraged funds appear to have become an amplifier of stress. Sharp changes in government bond prices, margin call and inability to rollover funding forced substantial sales of government bonds by these players (almost $ during March) which in turn generated further falls in government bond markets. Moves in government bond prices generated margin call liquidity pressures on pension funds and insurance companies adding to the pressure on core funding markets. See, for example, previous Financial Stability Reports, or the Financial Stability Paper No. 42 “Simulating stress across the financial system: the resilience of corporate bond markets and the role of investment funds” 13  11  All speeches are available online at www.bankofengland.co.uk/news/speeches  11  I have mentioned the role of margin in providing resilience against counterparty credit risk.
Financial System Resilience: Lessons from a real stress  Speech given by Sir Jon Cunliffe, Deputy Governor Financial Stability, Member of the Monetary Policy Committee, Member of the Financial Policy Committee and Member of the Prudential Regulation Committee  Investment Association Webinar, London Tuesday 9 June 2020  1  All speeches are available online at www.bankofengland.co.uk/news/speeches  The COVID 19 natural disaster has been the toughest test of the financial system since the global financial crisis 10 years ago. As the implications of the spread of the virus and the policy measures to contain it became apparent, over a few short weeks, we saw an abrupt and savage pricing down of economic prospects and economic assets across the globe. Investors, corporates, banks and households went into a defensive crouch, shunning risk, searching for safer havens, and stockpiling liquidity. Many of the resultant moves were unprecedented. Bank lending surged as corporates drew down on their liquidity facilities. In March, UK banks’ net lending to corporates shot up to £ billion, around 30 times the average monthly lending seen last year. The jump was even more striking in the US, where growth in the stock of corporate lending rose by over $ billion in the first four months of the year, compared to an increase of less than $ billion for 2019 as a whole. In financial markets, the FTSE All-Share index fell over 10% on 12 March, the largest one-day fall since 1987.