BoE warns of future risks from non-banks in markets crisis

Written by Adam Cadle

02/12/2024

UK non-bank resilience to market shocks has increased in a number of sectors and firms over recent years, according to the BoE’s system-wide exploratory scenario (SWES) exercise, but some of that resilience could deteriorate or change over time, risking greater amplification by the financial sector in the future.

The SWES is a ‘system-wide’ exercise, incorporating a wide range of financial firms and business models. It therefore provides insights into the behaviour of different parts of the financial system under stress, as well as dynamics driven by their interactions and how these can affect outcomes in markets core to UK financial stability and the financial system as a whole.

It found that some non-bank financial institutions (NBFI) sectors – such as insurers, LDI funds, and MMFs – have higher starting resilience than at the onset of historic stresses. For example, insurers have widened the eligible assets they can post as collateral, and LDI funds and MMFs had buffers well above regulatory minima. The BoE said this collectively reduces the severity of the amplification and, combined with positions in core markets at the reference date and the specifics of the scenario, mean that the gilt market does not come under severe stress in the SWES.

It added, however, that this result is contingent – particularly as the higher resilience of some sectors is not required by regulation. Lower NBFI resilience would result in a greater demand for liquidity under stress, and more NBFIs taking derisking actions due to risk or leverage constraints, leading to greater risks to financial stability.

“This highlights the importance of continuing to monitor core UK markets, and considering appropriate resilience across various sectors through domestic and international policy-making processes.”

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