The Bank of England (BoE) is intensifying its efforts to closely monitor risks in the non-bank financial sector, which includes private equity firms, hedge funds, and asset managers, according to a report by Institutional Investor.
Amid growing concerns over potential vulnerabilities in these institutions, BOE Governor Andrew Bailey highlighted the need for enhanced regulatory tools to better track the sector’s risk exposure.
Speaking at Bloomberg’s Global Regulatory Forum in New York, Bailey emphasised that current methods are insufficient to fully understand how non-bank financial institutions react under stress. “It is more in the way of a flow test – simulate shocks, let them flow through the system and see what happens,” Bailey explained, stressing the need to develop advanced surveillance tools to anticipate potential disruptions.
The BoE has been running a system-wide exploratory scenario, testing how banks and non-banks — such as investment funds, insurers, and hedge funds — cope with market shocks. This initiative is part of the central bank’s broader strategy to address systemic risks that have shifted from traditional banks to non-banks since the 2008 financial crisis. Results from this stress-testing exercise are expected by year-end.
Bailey noted that the non-bank financial sector, which now holds about half of the world’s financial assets, is complex and fragmented. “It’s an opaque and highly disparate world,” Bailey said, underscoring that it is more challenging to regulate compared to the relatively uniform banking sector.
In response to growing risks, the BoE has already announced plans for a new liquidity facility that non-banks can tap into during times of financial strain. Bailey also urged other central banks to introduce similar emergency measures for non-bank institutions to prevent future systemic crises.
The test scenario incorporated lessons from recent events, including the turmoil in the UK bond market in 2022. When pension fund managers faced margin calls tied to liability-driven investments (LDIs) following the collapse in gilt prices, the central bank had to intervene to stabilise the market.
“We need effective surveillance tools to detect problems earlier and address them before they escalate,” Bailey added, noting that financial stability has not traditionally been the primary focus of regulation in the non-bank world, a situation he believes must change to mitigate future risks.
