The wise heads on the Bank of England’s financial policy committee (FPC) discovered this year that they’re not as all-seeing as they might have thought. Their job is to spot financial risks before they become dangerous, but it turned out in late September there was a biggie they had missed – or, at least, seriously underplayed.
The debacle with LDI, or liability-driven investment, funds briefly threatened to blow a serious hole in the nation’s finances. In short, too many defined benefit pension schemes had been playing games of leverage to load up with extra helpings of gilts, or government IOUs. When Kwasi Kwarteng’s “mini”-budget upended gilt prices, the scramble among pension funds to shore up their derivative positions was chaotic.
As we already knew, and as the FPC’s financial stability report repeated on Tuesday, “a vicious spiral of collateral calls and forced gilt sales” created “a material risk to UK financial stability”. The danger only passed when the Bank started buying long-dated gilts to give the market an anchor.
It is a necessary moment, then, for a humbler FPC to ask what else might be lurking in the financial thicket. And here’s another acronym with potential to go mainstream: NBFI.
A non-bank financial institution can be a hedge fund, a private equity fund, a money market fund – virtually any type of fund – when it performs the lending role traditionally performed by a bank.
Since this “shadow banking” sector is reckoned to have doubled in size since the banking crash of 2008, it definitely matters to the grand scheme of risks. Ask a chief executive of a mainstream bank what keeps them awake at night and they’ll invariably refer to the players in the shadows.
Thus one can welcome the FPC’s sudden appetite to conduct stress tests on NBFI risks and leverage.
But there are three points to make here. First, the scope of the FPC’s “exploratory scenario exercise” is sketchy; it’s not yet clear who will be scrutinised, for example. Second, since NBFIs tend to span regulatory jurisdictions, it’s not obvious how the Bank could order remedies to excessive risk-taking. Third, since international bodies have been warning about the boom in shadow banking for a decade, this attempt to “inform understanding” of risks comes late in the day.
Given what happened with LDI, the tone feels too leisurely. More urgency required.
Too much, too soon for easyJet bonus
“The year was truly one of two halves,” writes Stephen Hester, chairman of easyJet, in the annual report. He’s referring to the airline’s six months of toil, when it was burning cash and battling Covid travel restrictions, and then the return of customers in huge numbers from about Easter onwards.
If you assumed a seesaw period produced the financial equivalent of a score draw, or even a win in extra time, you’d be mistaken. The headline loss (ie, ignoring a few one-offs) for the 12 months to September 2022 was £178m. The figure was about £1bn better than the loss in the previous Covid-afflicted year, but a loss is still a loss.
Somehow, though, easyJet’s remuneration committee saw reason to award chief executive Johan Lundgren a £1.2m bonus. His total pay was a whisker under £3m – the other elements being £833,000 of salary and benefits and a £925,000 share award.
The bonus arithmetic was laid out (Lundgren met most of his targets) but hardly explained when you see that only the lightest of trims was applied for what pay chair Moni Mannings coyly called “the overall experience of our shareholders during the year”. That experience in full: no dividend and a share price down by more than half.
Lundgren, no doubt, worked hard in trying circumstances; and the current year should be better if easyJet can sustain its summer momentum. But, come on, £1.2m is too much, too soon: the recovery hasn’t happened yet.
Sterling pounds the dollar
As US inflation slowed to its lowest rate since December 2021, and markets decided the Federal Reserve can afford to be gentler with its rate rises, the pound enjoyed another strong day against the dollar. There have been a few lately. At almost $1.24, sterling is now at a six-month high against the US currency.
The low during the crazy detour into Trussonomics, remember, was $1.04, which suddenly feels a long time ago. Betting on the defenestration of a wayward prime minister, it turns out, was the punting opportunity of the year.