The Bank of England (BoE) has launched its first system-wide exploratory scenario (SWES) exercise, with the aim of improving understanding of the behaviours of banks and non-bank financial institutions (NBFIs) in stressed financial market conditions.

The exercise will also be used to investigate how these behaviours and market dynamics can amplify shocks in markets and potentially bring about risks to UK financial stability.

Recent events have shown that market-based finance (MBF) has been increasingly prone to sudden liquidity stresses during periods of market volatility. Examples of this include the March 2020 ‘has for cash’ and the adverse gilt dynamics in September as a result of the mini-Budget.

Participating firms will include large banks, insurers, central counter-parties and a variety of funds (pension funds, hedge funds, and funds managed by asset managers), reflecting the range of institutions that engage in UK financial markets. As well as participating in the exercise, the firms will also be actively engaged in both the design and execution of the exercise.

Participants will be asked to evaluate the impact of a severe but plausible stress to global financial markets, and then to consider what action they would take in response to the scenario, focusing on behaviours in UK financial markets markets.

The BoE will then seek to understand the collective actions and responses of the firms and how they might amplify the initial stress in UK financial markets. Working closely with the Financial Conduct Authority (FCA) and the Pensions Regulator, the BoE will collect data and information from various parts of the financial system-wide and sector-specific insights.

Deputy governor for financial stability, Jon Cunliffe, said: “We regularly run scenario exercises with a variety of firms which support our efforts to protect and enhance the stability of the UK financial system. The launch of this exercise will provide valuable insight into the system-wide dynamics for banks and non-banks following a severe but plausible stress to financial markets.”

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