BoE reviews bank and buy-side behaviour under stress conditions
19 June 2023 UK
Image: kafai/stock.adobe.com
The Bank of England (BoE) has launched a system-wide exploratory scenario (SWES) exercise to explore how banks and non-bank financial institutions (NBFI) behave in stressed financial market conditions.
Through the exercise, the BoE aims to develop an understanding of what drives this behaviour. It will then determine how these behaviours could intensify shocks in UK financial markets and potentially threaten the UK’s financial stability.
Those participating in the exercise, who will also be a part of the design and execution process, will be asked to consider what actions they would take in response to a hypothetical stress to global financial markets.
The BoE will assess the collective actions from a system-wide perspective and determine where stress may be amplified in such situations. It will then work with the Financial Conduct Authority and the Pensions Regulator to develop both system-wide and sector-specific insights.
The full list of large banks, insurers, central counterparties, pension funds, hedge funds and funds managed by asset managers participating in the project will be released later this year, along with details of the stress test scenario.
A full account of the SWES’s findings, their implications and subsequent conclusions will be published in 2024.
Jon Cuncliffe, deputy governor for financial stability at the BoE, says: “We regularly run scenario exercises with a variety of firms which support our efforts to protect and enhance the stability of the UK financial system. 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.”
Joseph Cordahi, product strategy director at fintech NeoXam, commented: “Large institutional investment managers hold huge systemic importance to the global economic system, with some of the world’s biggest asset managers falling very much into the ‘too big to fail’ category.
“Hedge fund and pension fund managers should not wait for central banks to come knocking at their doors, they need to act now and begin voluntary stress testing measures. This will not only equip them for regulation down the line but will give them a competitive edge, which given the current climate, is crucial. To accurately stress test, investment managers need to have an accurate and timely view of portfolio transactions, trading positions, corporate actions, as well as pricing to support investment.”
Through the exercise, the BoE aims to develop an understanding of what drives this behaviour. It will then determine how these behaviours could intensify shocks in UK financial markets and potentially threaten the UK’s financial stability.
Those participating in the exercise, who will also be a part of the design and execution process, will be asked to consider what actions they would take in response to a hypothetical stress to global financial markets.
The BoE will assess the collective actions from a system-wide perspective and determine where stress may be amplified in such situations. It will then work with the Financial Conduct Authority and the Pensions Regulator to develop both system-wide and sector-specific insights.
The full list of large banks, insurers, central counterparties, pension funds, hedge funds and funds managed by asset managers participating in the project will be released later this year, along with details of the stress test scenario.
A full account of the SWES’s findings, their implications and subsequent conclusions will be published in 2024.
Jon Cuncliffe, deputy governor for financial stability at the BoE, says: “We regularly run scenario exercises with a variety of firms which support our efforts to protect and enhance the stability of the UK financial system. 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.”
Joseph Cordahi, product strategy director at fintech NeoXam, commented: “Large institutional investment managers hold huge systemic importance to the global economic system, with some of the world’s biggest asset managers falling very much into the ‘too big to fail’ category.
“Hedge fund and pension fund managers should not wait for central banks to come knocking at their doors, they need to act now and begin voluntary stress testing measures. This will not only equip them for regulation down the line but will give them a competitive edge, which given the current climate, is crucial. To accurately stress test, investment managers need to have an accurate and timely view of portfolio transactions, trading positions, corporate actions, as well as pricing to support investment.”
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