BoE publishes system-wide stress test results

The BoE launched its first system-wide exploratory exercise of how a range of firms behave in stressed market conditions mid-2023, it has now published a final report on how the UK financial system would respond to a market shock.

The aims of the exercise were to:

• enhance understanding of the risks to and from non-back financial institutions (NBFIs) and NFBI and bank behaviour in stress; and
• investigate how these behaviours and market dynamics can amplify shocks in markets and potentially pose risks to UK financial stability.

Approximately 50 participating firms, including banks, insurers, pension schemes, hedge funds, asset managers and central counterparties (CCPs), were subject to a hypothetical scenario comprising a sudden, sharp and severe shock to global financial markets due to sudden crystallisation of geopolitical tensions.

The BoE, working with the PRA, FCA and TPR, drew six key financial stability conclusions from the exercise:

• Firms’ collective actions amplify the initial shock: while non-bank resilience has increased over recent years, some of that resilience could deteriorate or change over time, risking greater amplification in the future;
• Repo market resilience is central to supporting core markets: during a market stress, banks are unlikely to provide all of the additional repo financing NBFIs ask for, despite their willingness to draw on central bank lending facilities;
• Actions taken by authorities and market participants following recent shocks have improved gilt market resilience, but further work is required for other vulnerabilities;
• The sterling corporate bond market could face a ‘jump to illiquidity’ in stress: the speed of selling pressures may significantly exceed purchasing capacity and prices would need to fall rapidly for the market to clear;
• System-wide stress exercises have proved an effective tool for financial stability authorities to understand system-level vulnerabilities; and
• System-wide exercises are important for regulators, firms and markets.

The BoE also published a specific report on the results of the CCP stress test.