The Bank of England’s release on Friday of the System-Wide Exploratory Scenario (SWES)

January 24, 2025
10:28 am

The Bank of England‘s release on Friday of the System-Wide Exploratory Scenario (SWES) final report provides a comprehensive analysis of the financial system’s vulnerabilities, particularly focusing on the role of non-bank financial institutions (NBFIs) during market stress. Having closely followed and discussed the SWES over the past months, it’s crucial to delve into the report’s detailed findings and their implications for financial stability.

It is the first exercise of its kind globally.

For a comprehensive understanding, access the full SWES final report here: https://lnkd.in/eNfymCGS

In-Depth Findings from the SWES Final Report:

Amplification of Market Shocks by NBFIs: The report underscores that entities such as pension funds, hedge funds, and private equity firms can significantly amplify financial shocks. In scenarios involving sudden increases in bond yields—potentially due to geopolitical tensions—NBFIs may incur substantial losses, leading to asset fire sales and further market destabilisation.

Liquidity Risks in Core Markets: The SWES highlights potential liquidity shortages in the gilt repo market and disruptions in the corporate bond market during periods of stress. A notable concern is the disparity between market participants’ expectations of liquidity and the actual availability under strained conditions, emphasising the necessity for robust liquidity risk management.

Systemic Vulnerabilities Due to Interconnectedness: The increasing interconnections between private equity and life insurance sectors present systemic risks. Complex and opaque arrangements within these sectors could heighten fragility in the global insurance landscape if not properly managed.

Implications for the Financial Sector:

While the SWES underscores areas of resilience, such as in money market funds and insurers, it also calls for enhanced risk management practices across the board. Financial institutions must integrate system-wide dynamics into their internal stress tests and risk assessments to better anticipate and mitigate potential amplification of shocks.

The Bank of England’s proactive approach in conducting this exploratory scenario is commendable. By fostering a deeper understanding of market behaviours under stress, the SWES serves as a crucial tool in bolstering the stability of the UK’s financial system.

As we navigate an increasingly complex financial landscape, it’s imperative for all stakeholders to remain vigilant, informed, and prepared to address emerging risks head-on.

SecFin Solutions

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