Bank of England Finds Non-Bank Financial Firms Pose Wider Risks in Crisis Periods
Article 0 Comments Non-bank financial institutions such as hedge funds remain vulnerable to a sudden financial shock and would not all be able to access the funding they would need in such a crisis, the Bank of England said on Friday. Announcing the results of its first system-wide test of Britain’s financial firms, the BoE said the growing non-bank financial sector has increased its resilience. But its reliance on bank funding in a crisis could lead to “greater risks for financial stability,” it said. Unlike typical stress tests which look at how big banks’ or other financial firms’ balance sheets fare during a crisis, the BoE’s System-Wide Exploratory Scenario examined how the actions of the whole network of financial firms, including banks, funds, insurers and central counterparties, could amplify shocks. The scenario envisaged a hypothetical situation in which “a sudden crystallization of geopolitical tensions” led to a sudden and severe market shock. Such a scenario may be more likely following the U.S. presidential election victory of Donald Trump who has repeatedly threatened to impose tariffs on foreign imports, that could in turn increase trade and political tensions with countries such as China. The results of the BoE’s exercise highlighted continuing...
