LONDON, Nov 29 (Reuters) – Non-bank monetary establishments equivalent to hedge funds stay susceptible to a sudden monetary shock and wouldn’t all have the ability to entry the funding they would want in such a disaster, the Financial institution of England mentioned on Friday.
Asserting the outcomes of its first system-wide check of Britain’s monetary companies, the BoE mentioned the rising non-bank monetary sector has elevated its resilience.
However its reliance on financial institution funding in a disaster might result in “higher dangers for monetary stability,” it mentioned.
Not like typical stress assessments which take a look at how huge banks’ or different monetary companies’ steadiness sheets fare throughout a disaster, the
BoE’s System-Huge Exploratory State of affairs examined how the actions of the entire community of monetary companies, together with banks, funds, insurers and central counterparties, might amplify shocks.
The situation envisaged a hypothetical scenario through which “a sudden crystallisation of geopolitical tensions” led to a sudden and extreme market shock.
Such a situation could also be extra possible following the U.S. presidential election victory of Donald Trump who has repeatedly threatened to impose tariffs on international imports, that might in flip enhance commerce and political tensions with nations equivalent to China.
The outcomes of the BoE’s train highlighted persevering with dangers within the non-bank monetary establishments sector, with many such companies anticipating to have the ability to rely in a disaster on so-called repo financing from banks that might be unlikely to be accessible.
Non-banks wanted to satisfy some 94 billion kilos value of margin calls within the situation, the BoE mentioned, forcing some gamers equivalent to hedge funds to promote belongings the place financial institution funding was not accessible.
The sterling company bond market would additionally come underneath strain, the BoE mentioned, as funds seeking to elevate money dumped company bonds right into a falling market, resulting in a “soar to illiquidity” with inadequate consumers.
Whereas the train was designed extra to tell companies in regards to the dangers than to result in direct coverage motion, the BoE mentioned its conclusions supported the broader work of the worldwide regulators to raised perceive and regulate the rising non-bank sector.
Regulators worldwide have been scrutinising extra intently the non-bank sector, which now accounts for about half of the worldwide monetary system, after a number of incidents the place such companies have wanted help in recent times.