Bank of England has kept alive the potential for stress-testing money managers and pension funds, said a report by the bank on its approach to stress-testing the U.K. banking system over the next three years.
The report Wednesday, said the bank aims to “provide clarity for firms and the wider public about our plans for stress testing” through 2018.
The report said Bank of England has used stress tests to assess the resilience of the banking sector, and the general insurance and life insurance sectors. While the Bank of England will focus on the U.K.'s major banks, it said there is merit in looking to develop stress-testing tools for the U.K. financial system as a whole, covering areas outside the core banking sector, such as money management firms and pension funds.
“Unlike the banking system stress test, its focus would not be on testing the resilience of individual firms. Rather, it would be to examine how the financial system behaves, and what this implies for systemic risk and the possibility of disruptions in the provision of financial services to the real economy,” the report said.
Money managers' roles in providing credit to the real economy and the financial system, through holdings of corporate bonds, bank debt and government debt, was highlighted by the Bank of England, as well as their role in securities lending, repurchase agreements and derivatives markets. “Their strategy for managing liquidity in stressed conditions could have important consequences for the overall level of market liquidity,” it said.
Hedge funds, through their frequent trading, links to banks via repurchase agreements and derivatives contracts, were potential targets for stress tests in the report, as were insurance companies and pension funds. Collectively, they are important investors in a range of financial instruments. “A change in their willingness to hold these assets could exacerbate the fall in the price of these assets in a stress scenario. This, in turn, would have an impact on the value of these assets held by other parts of the financial system,” the report said.
