Bank of England Governor Warns Non-Bank Institutions Control 50% of Assets
Bank of England (BoE) Governor Andrew Bailey addressed risks in financial markets at The University of Chicago Booth School of Business, noting that non-bank institutions now hold nearly 50% of global financial assets, up from 40% before the Global Financial Crisis. He emphasized the need for regulatory oversight to adapt to risks originating outside traditional banks.
Key points include:
- The rise of hedge funds and systematic trading strategies has increased market complexity.
- These funds can exacerbate liquidity shocks and sudden deleveraging during periods of stress.
- Non-bank financial entities remain less regulated than traditional banks, complicating risk assessment.
BoE’s New Stress Test Targets Non-Bank Risks
The BoE introduced the System-Wide Exploratory Scenario (SWES) stress test to evaluate how financial shocks impact both banks and non-banks. It aims to address gaps in liquidity access highlighted by past crises.
- The “Heineken Principle” no longer applies; central bank liquidity does not automatically reach all financial areas.
- Liquidity shortfalls for non-banks can trigger fire sales, causing market dysfunction.
New Liquidity Facility to Backstop Non-Bank Crises
The BoE launched the Contingent NBFI Repo Facility (CNRF), a tool activated under market stress to support insurance companies, pension funds, and other non-bank entities facing liquidity challenges.
Bailey noted that decentralized finance and stablecoins introduce additional risks that current regulatory frameworks do not adequately address, complicating liquidity management during crises.