The Bank of England will be vigilant over the possibility that investors will take greater risks after a year of relative stability in markets, Deputy Governor Dave Ramsden said on Monday.
Ramsden, who is head of markets at the BoE and in charge of its balance sheet, said there had been no major bank failures or bouts of market dysfunction in 2024, even though political events had stoked volatility.
“I am … mindful that whilst this has been a year of relative stability, that is never a sign that we should get complacent,” Ramsden said in a speech at the Official Monetary and Financial Institutions Forum, a think tank.
“As famed economist Hyman Minsky once said, ‘stability breeds instability’ and the comparatively calmer market conditions of this year could lead to greater risk-taking in future,” Ramsden added.
Britain’s government bond market – the subject of a meltdown in 2022 triggered by then-Prime Minister Liz Truss’s unfunded tax cuts and exacerbated by the structure of pension funds – was functioning in an orderly manner, Ramsden said.
But he added vulnerabilities remained around the leverage of hedge funds and the concentration of the market – something the BoE would watch carefully.
Last month the BoE said financial firms outside the banking system, such as hedge funds, remained vulnerable to a sudden financial shock and would not all be able to access the funding they would need in such a crisis.
Ramsden’s speech also touched on the Contingent Non-Bank Financial Institution Repo Facility (CNRF), a new financial stability tool that insurers and pension funds will be able to use during severe turbulence in the gilt market.
He said he understood why these companies were interested to know the circumstances under which BoE would activate the CNRF, but he said the central bank could not give a definitive list, given how market dysfunction can arise in different ways.
“What I can say is that the Bank will draw on a mix of quantitative and qualitative information to assess whether the conditions for activating the CNRF are met,” Ramsden said.
(Writing by Andy Bruce）
