Bank of England launches first sector-wide 'stress test'
THE Bank of England has launched its first system-wide “stress test” to establish how big banks, insurers, clearing houses and investment funds collectively behave during extreme stresses in markets, it said on Monday (Jun 19).
The BOE had said in December that investment funds and other non-bank financial institutions would face their first ‘stress test’ to apply lessons from the near-meltdown in Britain’s pension fund sector in September.
Liability-driven investment (LDI) funds, used by pension funds to ensure their long-term payouts, struggled to meet collateral calls after turmoil caused by the fiscal plans of Liz Truss’s short-lived government in September. The BOE had to step in to buy government bonds to stabilise markets.
Money market funds came under “dash-for-cash” pressure during market stresses following economy lockdowns to fight Covid-19.
“The launch of this exercise will provide valuable insight into the system-wide dynamics for banks and non-banks following a severe but plausible stress to financial markets,” BOE Deputy Governor Jon Cunliffe said in a statement.
The BOE has long run separate stress tests of banks and insurers, but this is the first financial-system wide test, with the bank saying results are expected some time next year.
Participants will be actively engaged in both the design and execution of the exercise that will focus on UK government bond and repo markets, sterling corporate bond markets and associated derivatives markets, the BOE said.
“The exercise is not a test of the resilience of the individual firms participating. Published materials will not provide information on any individual firms.”
The test is the latest sign of how central banks are seeking a grip on the huge non-bank sector, traditionally the purview of securities watchdogs. REUTERS
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