00:00So what they're doing is the hedge funds are borrowing money so that they can bet on small changes in the price of these gilts.
00:08The challenge is that if you have a crowded trade, that means that there are, with a small number of players,
00:15there's a risk that if there is something which makes these players nervous, they all unwind the trade at the same time.
00:20And because it's leveraged, the trade is much bigger than they are, and that has a financial stability impact on the gilt market.
00:27So we've had this, some of the regular listeners will know this has been a factor for the U.S. Treasury markets for ages.
00:33There is a multi-trillion dollar on and off trade around the U.S. Treasury market basis trade, which has unnerved global regulations.
00:39And the BOE has previously warned on that. Their concerns are now closer to home.
00:44And I guess the fear is that if there are unpredictable price moves or there are political issues or anything which makes people want to rebalance,
00:52that then leads to a potential disorderly unwinding of the trade and that can impact markets.
00:59The challenge is there's not a ton that the Bank of England can do about it.
01:03I mean, they can warn about it. They can say, we think hedge funds should adequately manage their risk.
01:08I doubt any hedge fund is sitting there thinking, OK, I'm going to engage in some inadequate risk management today.
01:12So it really is just a question of calling attention to it, making people conscious of it.
01:18They can maybe, another part of the Bank of England can make sure that the banks themselves are being cognizant of the risks
01:25which they are allowing hedge funds to take and making sure that any lending they're doing, that they're managing the lending.
01:31But beyond that, it is a case of wait and see.
01:33I mean, we've had massive concerns about the U.S. Treasury's basis trade for quite some time,
01:37and the basis trade has not come down during that time.
01:39Yes, but a very interesting warning nonetheless to keep an eye on, as you say, Laura,
01:45even if the bank's powers are fairly limited on that.
01:47But one of the things the bank has also been publishing some data on is the stress tests of the U.K.'s largest lenders.
01:53All seven of the biggest banks passing the stress tests.
01:57What's your reading of the outcome of that?
01:59They did. And do you know how long it's been since a bank last failed the U.K. stress tests?
02:04Quiz for you there, Stephen. Take a guess.
02:06Well, what, 2009?
02:07No, it was actually more recent than that, 2016.
02:11But these days, almost nobody fails stress tests.
02:13So we are very, I mean, it would have been a big shock if anyone had failed the stress test.
02:17But it's pretty much impossible now because banks are so closely monitored.
02:21Their capital is monitored on an ongoing basis.
02:23But the stress test is another reassuring sign.
02:26It does lead me on to my favourite topic of the day, which is the U.K. bank capital revamp.
02:30So what the Bank of England also announced this morning was that for the first time in a decade,
02:34they have changed their view on what the optimum level of capital in the U.K. banking system is.
02:40And they now think it is one percentage point lower than it was 10 years ago.
02:44And they're going to make some changes in 2027 to operationalise that or to effectively require banks to hold less capital.
02:51And they're consulting on other things as well, which is super interesting because it's against a backdrop of,
02:56as you say, there are rising risks around the guild market trades.
02:59They're also concerned about AI.
03:01They're concerned about the private market risks.
03:03But at the same time, they are actually, this is the closest we've come, and they hate this word,
03:08this is the closest we've come to deregulation.
03:10Because what you're talking about is saying, we think the bank needs less,
03:15that banks need less capital than they used to.
03:19And that matters.
03:19So this decision, my understanding is this decision could come as soon as next week.
03:24Is that right when it comes to the U.K. bank's capital requirements?
03:27Oh, they actually announced that earlier too.
03:28It was just lost among the many, many pages.
03:30So they have, they had an 80-page document.
03:32So what they have said they will do so far is they have said,
03:35we are going to cut something called Pillar 2A.
03:38We're going to do that at the start of 2027 when the next Basel package on global capital comes in.
03:43And that is because we recognize banks now need less capital than we thought they needed.
03:49What they're still going to do is in the first half of next year,
03:53they're having a consultation on various other things,
03:56which might actually improve the landscape for bank capital.
03:59Now, the devil will be in the detail.
04:01And shares have moved a bit on this, but not a ton.
04:03And I think there was a lot of detail this morning.
04:06People aren't really sure what it all means.
04:07The other constant tension is banks don't like to live on the edge when it comes to capital.
04:13So it's a bit like the monetary policy issue around the transmission mechanism.
04:18So it's not obvious that if I cut your requirements by one percentage point,
04:22you're going to immediately lend that money out or spend it on share buybacks.
04:25Because there's always a fear about, first of all, how permanent is that cut going to be?
04:29Because these things could even flow with how people are feeling about risk.
04:34But it tends to take a while for banks to get comfortable with the fact that,
04:39OK, the BOE is now happy for them to have less capital and they can actually mobilize that.
04:44But it'll be so interesting to watch, for me anyway.
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