Bank of England launches first system-wide exploratory scenario exercise

The exercise aims to improve understanding of the behaviours of banks and non-bank financial institutions (NBFIs) in stressed financial market conditions. It will explore how those behaviours might interact to amplify shocks in UK financial markets that are core to UK financial stability.

Participating firms will include large banks, insurers, central counterparties and a variety of funds (pension funds, hedge funds, and funds managed by asset managers). This reflects the wide range of institutions engaged in UK financial markets. Participants will be actively engaged in both the design and execution of the exercise.

Recent events have shown that market-based finance (MBF) has been increasingly prone to sudden liquidity stresses during periods of market volatility. The March 2020 ‘dash for cash’ and the adverse gilt dynamics seen in September 2022, which required Bank intervention, act as examples.

The exercise aims to enhance understanding of the risks to and from NBFIs, and the behaviour of NBFIs and banks in stress, including what drives that behaviour; and

investigate how these behaviours and market dynamics can amplify shocks in markets and potentially bring about risks to UK financial stability.

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.”