Some firms operating in the British government bond market have made insufficient preparations for a future crisis, potentially increasing the need for public bailouts, Bank of England policymaker Jonathan Hall cautioned on Thursday. Hall, an external member of the BoE’s Financial Policy Committee, highlighted the risk of a repeat of the 2008 financial crisis, where public funds were used to bail out banks to avert a larger economic collapse.
According to Hall, tighter banking regulations have shifted risk-taking to less-regulated hedge funds and money market funds located outside Britain. He noted the increasing importance of non-bank financial institutions in systemic markets like gilts, despite their low levels of self-insurance and location outside the UK regulatory perimeter. The Bank of England bought 19.3 billion pounds of British government debt in 2022 after bond prices slumped following Prime Minister Liz Truss’ budget proposals.
Hall emphasised that market support mechanisms should primarily aid well-regulated non-bank firms, such as pension funds, liability-driven investment funds, and insurers. He suggested that any BoE intervention should be structured to allow excessively risky firms to fail before assistance is provided. The BoE has also warned that AI speculation was pushing up share prices in a way similar to the dotcom bubble at the start of the millennium.
Continued international cooperation is essential to ensure that foreign businesses operating in British markets are adequately regulated, Hall stressed. He cautioned against reduced global cooperation, as it would unfairly transfer the cost of insurance from overseas firms to UK institutions and the UK public. On Tuesday, BoE Governor Andrew Bailey said the recent collapses of U.S. auto parts maker First Brands had echoes of the start of the global financial crisis.