BoE's Hauser says better tools needed to tame market turmoil

By David Milliken

LONDON (Reuters) - Central banks need to improve their tools for curbing instability in financial markets after the global bond market turmoil at the start of the COVID-19 pandemic and a repeat in Britain last year, a senior Bank of England official said on Friday.

The central bank bought 19 billion pounds ($23 billion) of government debt in an emergency move in September and October after former prime minister Liz Truss's tax cut plans triggered record falls in bond prices, threatening pension funds.

Andrew Hauser, the BoE's executive director for markets, said a broader public agreement was needed on how much financial instability was acceptable, what elements financial institutions should be expected to insure against, and in what cases it was better for central banks to step in.

"Without clearer guide rails of this kind, we are destined to proceed somewhat messily from crisis to crisis, building a framework by circumstance rather than by design," Hauser said, in remarks to be delivered on Friday at the University of Chicago Booth School of Business.

Last month, the BoE promised tougher rules for liability-driven investment (LDI) funds used by pension funds, which were at the heart of last year's turmoil. But the rules could put LDI funds out of reach for smaller pension funds, the BoE warned.

Regulators also needed to decide whether it was better to buy distressed assets and then sell them back - as the BoE did last year - or to borrow and lend securities to help firms in trouble, Hauser said.

"Most of us share the instinct that lending tools are the right place to start - but progress on defining the set of non-bank firms that are needed, able and appropriately incentivised to participate has so far been limited," he said.

Hauser said it would be preferable for central banks to offer permanent standing facilities, rather than expecting financial institutions to guess if and when there would be official intervention during a crisis.

However, finding an appropriate design that would work during future crises would be hard.

"Standing facilities that are calibrated either too vaguely to shape ex ante behaviours, or too specifically to be able to flex in response to events, are unlikely to be of lasting value," he said.

($1 = 0.8335 pounds)

(Reporting by David Milliken; Editing by William Schomberg and Sharon Singleton)