LONDON (Reuters) -State Street said on Tuesday it was unaware how much leverage was tied up in liability-driven investment (LDI) funds which came under extreme stress last year after British government bond yields rocketed.
LDI funds are used by UK pension funds to help ensure they can pay pensions.
“We had no idea how much leverage was in the system,” State Street CEO Ronald O’Hanley told a panel at the World Economic Forum in Davos.
State Street manages LDI products and provides collateral services for them, he said.
LDI funds were unable to meet collateral calls on time when the British government’s “mini-budget” spooked financial markets in September 2022, forcing the Bank of England to intervene by buying UK government bonds to stabilise yields and ease pressure on the funds.
“The challenge there wasn’t the product, the challenge there was leverage and this is the problem,” O’Hanley said.
“You can have a very good product but when you start to add leverage to it, that’s where the problem begins,” O’Hanley added.
The Bank of England has said the difficulties with LDI showed how “hidden leverage” can build up in the huge non-bank system and that more transparency was needed.
(Reporting by Elizabeth Howcroft and Huw Jones; Editing by Alex Richardson)