With Leverage Comes Responsibility – Jonathan Hall
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Jon Hall (Financial Policy Committee of the Bank of England) speaks about the dynamic nature of leverage and the tension between deleveraging activity and financial stability. Jon talks on the Liability Driven Investment structures that amplified the market shock of autumn 2022.
In particular, Jon sets out that when asset prices decline, a leveraged investor only has three alternatives:
- Dynamically deleverage by selling assets into a declining market, amplifying market moves
- Temporarily accept higher leverage, risking ‘cliff-edge’ deleveraging if prices fall further
- Deleverage by raising capital
He then illustrates the mechanism by which the first two alternatives increase financial stability risks, particularly in the event of a negative price shock.
Alternative three is therefore the most preferable from a financial stability perspective, but only if the investor takes seriously their responsibility to have the liquid assets, and operational capabilities, necessary to meet any capital calls.
These arguments and the financial stability implications can be applied broadly to any strategy which results in the investor selling assets into a declining market.
Jon sets out the FPC’s response to the events of late 2022 and highlights the importance for the ongoing work of the recently announced System Wide Exploratory Scenario stress test.
About the Speaker
Jonathan Hall is an external member of the Bank of England Financial Policy Committee (FPC). He was appointed in June 2020 and started his role in September 2020. He is also a member of the Founders Circle of the Institute for the Future of Work (IFOW) and is in the process of completing a PhD in Philosophy of Mind at Edinburgh University. He has an MA in Physics and Philosophy from Oxford University.
Jonathan has over 25 years of experience in the financial sector and previously worked as a Portfolio Manager at Eisler Capital (2016-2018) and as an Advisory Director at Goldman Sachs (2014-2015). He sat on the Board and Executive Committee of International Swaps and Derivatives Association, the Board of Tradeweb, the Financial Stability Board Market Participants Group on Reforming Interest Rate Benchmarks, and the Bank of England Working Group on Risk-Free Reference Rates.
Prior to this Jonathan spent 10 years at Goldman Sachs (2003-2013) in London and New York , becoming a Partner in 2008. He started his career at Credit Suisse Financial Products (1995-2003) and worked for them in London, Tokyo, Sydney and Hong Kong.