BoE to explore insurers’ reaction to ‘severe but plausible’ stress
Pardon the Interruption
This article is just an example of the content available to mallowstreet members.
On average over 150 pieces of new content are published from across the industry per month on mallowstreet. Members get access to the latest developments, industry views and a range of in-depth research.
All the content on mallowstreet is accredited for CPD by the PMI and is available to trustees for free.
The Bank of England has launched its first system-wide exercise to improve understanding of the behaviours of insurers and other financial institutions in stressed financial market conditions.
The BoE’s system-wide scenario exercise “will explore how those behaviours might interact to amplify shocks in UK financial markets that are core to UK financial stability”, it said.
It said recent events such as ‘dash for cash’ in March 2020, when investors sold securities rapidly following the economic disruptions associated with Covid-19, and the gilt crisis in September 2022 have shown that “finance has been increasingly prone to sudden liquidity stresses during periods of market volatility”.
In light of these events, the Bank also aims to enhance understanding of the risks to and from non-bank financial institutions and the behaviour of those and banks in stress and to investigate how these behaviours and market dynamics can amplify shocks in markets and potentially pose risks to UK financial stability.
The Bank stressed the exercise is not a test of the resilience of individual firms, but an opportunity to improve the Bank’s and participating firms’ understanding of how markets operate under stress.
Participants will be asked to evaluate the impact of a “severe but plausible stress” on global financial markets and consider what actions they would take in response to the scenario, with a focus on behaviours in UK financial markets.
Who will participate in SWES?
Participating firms in this exercise include insurers, large banks, central counterparties, and a variety of funds including pension funds, hedge funds and funds managed by asset managers. The BoE has worked with the Financial Conduct Authority and the Pensions Regulator to select a sample set of firms which are representative of markets that are core to UK financial stability, based on their activity, business models and investment strategies to ensure diversity within this sample.
The Bank will publish the full list of participants and details of the stress scenario later in the year.
A final report will be published in 2024, which will include the system-wide findings, implications for the SWES markets of focus, and any conclusions for the central bank’s assessment of risks to UK financial stability.
What assets would you sell under stressed scenarios?
