Jon Cunliffe: The impact of leveraged investors on market liquidity and financial stability

Speech by Sir Jon Cunliffe, Deputy Governor for Financial Stability of the Bank of England, at the Managed Funds Association Global Summit 2020, 12 November 2020.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Thank you, Brooke, for that kind introduction and for inviting me to speak today on financial stability and market liquidity.

Earlier this year, we experienced the first real test of the financial system since the global financial crisis, 10 years ago. The pandemic that struck last spring was, and remains a true economic tail event; global GDP in the second quarter dropped by around 9%1 and is not forecast by the IMF to return to pre COVID levels until at least 20222. In the UK, GDP declined by nearly 20% in the second quarter, the sharpest recession since that caused by the Great Frost at the beginning of the 18th century. Economic prospects declined and economic risks soared in a matter of weeks. As they did so, the financial system came under a very severe stress from changing asset prices and demands for liquidity and from the shift to remote working.

The banking system appears to have come through this initial stress well, meeting the emerging demand from clients for liquidity, avoiding deleveraging and generally being able to provide support for the real economy. However, we saw extreme turmoil in financial markets - the so called 'dash for cash' - which was only calmed by massive central bank intervention.