BoE to run system-wide evaluation on financial system including non-banks

Bank of England on Monday announced that it will conduct a system-wide exploratory scenario (SWES) exercise on the UK financial markets to see how well both banks and non-bank financial institutions can handle high-stress market conditions.

Participants of the evaluation, who will help design and execute the test, will include not only large banks but also insurers, central counterparties, pension fund, hedge funds as well as funds managed by asset managers. The test will cover the gilt market, gilt repo market, GBP corporate bond market and the associated derivative markets.

The Financial Conduct Authority and the Pensions Regulator will help facilitate the exercise by consolidating data and information from different parts of the financial system to develop system-wide as well as sector-specific insights.

BoE mentioned sudden liquidity stress events such as the March 2020 ‘dash for cash’ and the September 2023 gilt crisis as the driving forces for such exercise, as the Bank seeks to understand better the risks from and to non-banks during stressed market conditions, as well as how the market dynamics and the responses from both banks and non-banks may amplify the shocks facing the UK financial markets.

Not targeting individual financial institutions

“The exercise is not a test of the resilience of the individual firms participating,” BoE stated in the press release, as it will not prove any information on any participating financial institutions. The results, of which a full report is expected in 2024, will be used to address vulnerabilities in the domestic market-based finance system and improve the bank’s ongoing international policy work.

The Bank plans to release the full list of participants and details of the stress scenario later this year.