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The Bank of England will carry out a first of its kind stress test of vulnerabilities in non-bank financial markets next year, after September’s implosion of UK pension funds exposed gaps in policymakers’ understanding of systemic risk in key markets.
The BoE announced the exercise in its latest financial stability update, where it noted that while UK households are being “stretched” by rising interest rates and soaring inflation, they were not yet showing “widespread signs of financial difficulties” or an inability to repay loans.
The UK’s corporate sector and banks were both described as well positioned to withstand the worsening economic outlook, with the non-bank financial sector coming in for the most severe warnings from the senior bank officials and external experts who make up the Financial Policy Committee.
The FPC said international regulators need to “urgently . . . develop and implement appropriate policy responses” to tame risk stemming from non-bank financial institutions, whose share of the global financial services market has more than doubled since the 2007-08 financial crisis.
In the meantime, the BoE is planning a global first — a “deep dive into specific risks” into financial markets dominated by institutions such as hedge funds, mutual funds and pension funds so that policymakers can assess the scale of risks “and propose solutions”.
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