But it is worth reiterating that the Bank’s intervention last autumn was to focus on the resilience of the gilt market, rather than to protect the funds and schemes themselves. So LDI funds should carefully consider their individual risk profile. And pension schemes should not mistake naturally occurring variation in resilience, which reflects variation in risks, for a race to the bottom. These proposed resilience levels are broadly consistent with those firms have been maintaining since the co-ordinated regulatory action last autumn. And indeed they have been put to the test recently. Between end March and late May, the benchmark 30-year index-linked gilt yield rose by 82 basis points. During that time, the largest five-day move stood at 27 basis points. These changes in yields mechanically reduced the resilience of LDI funds and led to a number of LDI funds recapitalising in order to replenish their resilience. This recent volatility shows that the resilience framework recommended by the FPC is functioning broadly as intended, with funds holding significantly larger buffers than last year on average and initiating recapitalisation at far higher levels of resilience than they did previously. It means they have managed to absorb rather than amplify this shock. So far so good. We will though assess whether there are any lessons to be learned from this recent experience for the implementation of the FPC recommendations and TPR guidance. Of course, LDI funds are not expected to self-insure against all possible shocks.
I’ve spent this morning talking about measures to tackle the root cause of the stress last autumn, poorly managed leverage. But LDI funds aren’t the only non-bank to use leverage. [20] And leverage is also not the only vulnerability in the non-bank system. Forced selling that can follow from leverage can also arise from liquidity mismatches[21] or from a lack of preparedness for margin calls. [22] Identifying vulnerabilities is only half the battle. We also need to understand how market participants will behave when a stress hits. To this end, the Bank is very shortly launching its exploratory exercise to enhance understanding of the risks to and from non-banks, their behaviours, and how these behaviours can amplify shocks. As part of this exercise the Bank may reach out to some of you attending this conference. Shining a light on how market participants may behave collectively in a stress will help both the Bank and yourselves better prepare for such events. You’ll hear plenty from us once the exercise is launched. In particular, my colleague Lee Foulger will be giving a speech next week outlining how this exercise will helps us to better understand system-wide resilience. But what should we do about these vulnerabilities? We should seek to contain them and to mitigate their financial stability impact. This is what I’ve laid out today with respect to LDI funds’ leverage. Further frameworks may need to be built up.