The Bank of England has called for tougher rules governing pension schemes and major lenders outside the banking mainstream as it seeks to restore confidence in the wider financial system.
British banks remain resilient to further financial shocks, the Bank said on Wednesday, but there was greater urgency to make non-bank finance companies that lend trillions of dollars globally more resilient.
In its quarterly report on the health of the UK’s financial system, the central bank’s financial policy committee said pension funds hit by last autumn’s crisis in liability driven investments, when a sharp fall in the value of government bonds triggered a fire sale of assets, would need to increase their reserves to prevent it happening again.
It called for funds using LDIs to face new stress tests to stop a repeat of the crisis that followed Kwasi Kwarteng’s poorly received mini-budget in September.
The FPC added that it was monitoring the behaviour of investors after a flight to safety earlier this month on the back of the collapse of the US bank Silicon Valley Bank and the rescue of the Swiss lender Credit Suisse.
Its report said the global financial system was still adjusting to higher interest rates in the US, euro area and the UK, which could lead to difficulties for some lenders.
Assessing the economic situation in the UK, the FPC concluded the pressure on households and companies had eased since its last review in December. Reduced gas prices and lower than previously estimated unemployment meant they were more likely to be able to cope with higher debt payments. Banks were also in a strong position to cope with domestic and overseas-generated shocks.
“Major banks have large liquidity asset buffers, around two-thirds of which are currently either in the form of cash or central bank reserves,” the report said, adding that banks were also generating bigger profits to protect themselves. “The UK banking system therefore has the capacity to support the economy in a period of higher interest rates even if economic conditions are worse than expected,” it said.
In comments to MPs in parliament on Tuesday, the Bank’s governor, Andrew Bailey, said the central bank was on high alert and would remain “vigilant” to further turmoil after the recent collapse of SVB, saying it was the fastest demise of a lender since Barings Bank in the mid-1990s.
The FPC said pension funds and other major institutions in the financial system, including money market funds, needed to be more resilient when investor panic triggered a flight to safety across global money markets.
“Increasing the resilience of money market funds is necessary to reduce systemic risk in the UK and the global financial system.”
While banks have come under the spotlight since the financial crash in 2008, money market funds are among many intermediaries in the financial system to escape stringent rules that demand they keep high levels of reserves.
The Bank of International Settlements, the Swiss-based advisory body for all central banks, has warned in the past decade that the increasing influence of non-bank lenders should be considered when drawing up financial regulations.
However, it could be several years before the UK takes any action after the FPC said a consultation paper would not be published until later this year.
