Bank of England to intensify its system-wide stress test in 2024

The Bank of England said on Friday that it would begin the second phase of its initial system-wide stress test, which will examine how clearing houses, insurers, banks, and pension plans respond to shocks related to interest rates and the prices of hazardous assets over a ten-day period.

In June, the BoE said that it would begin collecting data from more than 50 companies as part of its first system-wide exploratory scenario, often known as a sector-wide stress test (SWES).

The Bank provided additional details about the test on Friday, stating that it would examine circumstances that were harsher, more widespread, and longer-lasting than the March 2020 "dash for cash," the pandemic lockdowns that followed, or the collapse of UK government bonds during the liability-driven investment (LDI) crisis that occurred in September and October of last year.

International authorities have been contacted, including the European Central Bank, the Federal Reserve, and regulators in Dublin and Luxembourg, where many funds marketed in the United Kingdom are listed.

The Bank is interested in observing how market participants handle situations where there are significant demands for liquidity, including having to quickly fulfil margin calls on holdings.

The $239 trillion non-bank sector, which now makes up over half of the global financial industry, is the subject of increased scrutiny from regulators throughout the world.

In 2020, the BoE intervened to purchase government bonds in order to relieve liquidity at LDI funds after the Federal Reserve was forced to inject liquidity to support money market funds.

The results of the BoE will inform global regulatory policy in an effort to reduce the likelihood that central banks will intervene in this way during future market crises.

(Sources: investing.com, reuters.com)