What effect has quantitative easing had on pension deficits of large UK companies? A recent study has suggested that the final-salary pension shortfall of the top 350 companies in the UK has quadrupled over the past year from £20 billion to £80 billion. The authors of the report suggest that this increase is largely due to falling gilt yields, arising from the fact that the Bank of England has bought a third of the gilt market through quantitative easing. But this report ignores the impact of quantitative easing on equities and other real assets held by pension funds. As highlighted in an earlier post, quantitative easing may have helped sustain returns on real assets.
As an undergraduate, I was taught about the failure of Herstatt Bank in 1974 and Herstatt risk. This bank was only the 35th largest bank in Germany at the time so why would anyone be interested in studying its failure? Herstatt failed because of its involvement in risky foreign exchange business. When it closed its doors on 26 June 1974, counterparty banks (mainly in New York) had not received dollars due to them because of time-zone differences - this is known as settlement risk. The cross-jurisdictional implications of its failure resulted in the Bank for International Settlements setting up the Basel Committee on Banking Supervision and Herstatt's failure was a key reason for the establishment of real-time gross settlements systems, which ensures that payments between two banks are executed in real time. The Bank of England's Ben Norman has an interesting post on Herstatt over at the Bank's new blog ( Bank Underground ). As well as giving an excellent overview of