The Bank of England has begun to test the resilience of banks and other financial institutions to weather shocks similar to those of last year’s mini-budget upheaval.
It will put institutions through the test to help understand the risks to and those created by financial institutions apart from banks, the Bank of England said.
The exercise will also investigate how these organisations act under stress, and what drives their responses.
The investigation will also look into how the way the market works, can amplify shocks and put the financial stability of the UK at risk.
“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,” said Jon Cunliffe, deputy governor for financial stability.
“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.”
Inflation around the world – in pictures
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People queue to buy wheat flour at government-controlled prices in Islamabad. Pakistan's economy has been hit hard by a political crisis, as well as devastating floods and the global energy crisis, with the rupee plummeting and inflation at decades-high levels. AFP -
A market in Rio de Janeiro. Brazil's inflation ended 2022 with a sharp slowdown from double-digit peaks seen throughout the year. Reuters -
A market in Istanbul. Turkey's inflation at the end of 2022 stood at 64. 27 per cent, the country's Statistical Institute said, while the independent group of inflation researchers ENAG calculated it at 137. 55 per cent. EPA -
A Walmart in New Jersey. According to a poll, US Republicans and Democrats have distinct views of what’s most important for the government to address amid high inflation. More Republicans name gas and food prices, energy and immigration, while Democrats focus on health care, climate change and poverty. AP -
A used car sales lot in California. US Federal Reserve officials have indicated it’s possibly too early to declare victory over inflation. AFP -
A person walks by a sign showing interest rates at a bank in New York. EPA -
A woman walks with purchases past a store in Berlin. In December, consumer price growth across the Euro zone slowed to 9.2 per cent from 10.1 per cent a month earlier, Eurostat data showed last week. AP -
Workers sit in front of a banner reading "Stop the Inflation Monster" at the Burchardkai Container Terminal as they go on strike for higher wages at the harbour in Hamburg, Germany. Reuters -
Price tags at a market in Nice, France. Reuters -
Commuters cross Waterloo Bridge in London. The British Retail Consortium said spending in store chains rose by 6.9 per cent in annual terms in December, but this was a long way off consumer price inflation, which hit 10.7 per cent in November. Reuters -
Jobseekers in Johannesburg. South Africa’s governing party wants the central bank’s mandate broadened to shore up the economy and promote employment in addition to its existing task of tackling inflation. Reuters -
Social grant recipients stand in a queue outside a post office, as joblessness takes its toll in Meadowlands, South Africa. Reuters
It comes following the “dash for cash” in March 2020 and what the bank called the “adverse gilt dynamics” which followed September’s mini-budget.
Markets were cast into uproar in September, when new Conservative leader and prime minister Liz Truss set out her plan for the economy.
Much of the problem was in the market for government loans – known as gilts – which put pressure on so-called liability-driven investment funds, are used heavily by pension funds.
The Bank of England had to step in to help shore up some of these funds as they struggled to meet demand from investors trying to pull their cash out.
A final report on how the systems performed in the test will be published next year. It will not say how individual institutions did, however, but a list of all those who took part will be published.
