BOE staff find good in swaps the Pope warned about

Bloomberg

Complex instruments used by hedge funds to bet on borrowers going bust and linked to “extremely immoral actions” by the Vatican, can actually improve the health of financial markets, according to Bank of England staff.
Bonds insured by credit-default swaps are likely to trade more frequently than securities not covered by these derivatives, according to research by Robert Czech of the BOE’s capital markets division, published in a blog. More liquid bonds are easier to sell, which benefits investors at times of market stress.
“In theory, CDS contracts can reduce risks in financial markets by providing valuable insurance,” wrote Czech. “CDS also offer another, more subtle benefit: an increase in the liquidity of the underlying bonds.”
Credit-default swaps have repeatedly come under scrutiny from regulators after being linked to shady deals and because they are widely seen as having contributed to the 2008 global financial crisis. Warren Buffett once called them “financial weapons of mass destruction” while last year, the Vatican released a sweeping critique of global finance that referred to the instruments as “a ticking time bomb.”
“Critics refer to CDS as a global joke that should be outlawed, not at least due to the opaque market structure,” wrote Czech. But those critics may be overlooking some beneficial effects of CDS market, he said.
Investors with active CDS contracts on a particular firm have 60% higher buy volumes in the issuer’s bonds than non-CDS counterparties, according to the research. Liquidity spillover between the two markets is particularly pronounced around the time of rating downgrades. CDS counterparties increase their buy volumes in bonds of downgraded issuers, absorbing fire sales that come from other investors, he wrote.
Still, criticism of credit swaps isn’t entirely unjustified, Czech wrote. Manufactured credit events, whereby investors make money by enticing companies to miss bond payments they could otherwise make, are a “prominent example” of “questionable practices.”
The post appeared on Bank Underground, a blog that allows staff to share commentary and analysis as part of Governor Mark Carney’s effort to increase transparency.

‘Next BOE Head Mustn’t Be Seen as Deliverer of Brexit’
The next Bank of England governor shouldn’t be appointed to deliver Brexit, and they must have an intimate knowledge of the UK and its institutions, according to the director of the National Institute of Economic and Social Research The next head of Britain’s central bank must “ensure monetary and financial stability, subject to whatever constraints any government may place on him or her” and must look “far beyond any cliff edge,” Niesr Director Jagjit Chadha said in a blog post.
Prime Minister Boris Johnson has pledged to take Britain out of the European union on October 31 “do or die,” and BOE watchers have speculated over whether his administration will appoint a governor in line with his views on the best way forward.
Chadha, who previously worked at the BOE, suggested that bringing someone in from overseas, or even from outside the bank, might not be best choice.
Current governor Mark Carney, who steps down at the end of January, is a Canadian national who previously headed that country’s central bank. He has been roundly criticized by Brexit supporters for his economic analysis of the decision to leave the European Union, and the risks of departing without a transition agreement.
The UK Treasury has been conducting interviews for Carney’s successor, with a decision expected in the autumn.
Potential candidates include BOE insiders such as Andrew Bailey, head of the Financial Conduct Authority, and Deputy Governor Ben Broadbent. Outsiders considered to be in running include Gerard Lyons.
, an economist who backs Brexit and was previously chief economic adviser to Johnson when he was mayor of London.