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He Bank of England (BoE) has issued a report highlighting the need for additional measures to address risks in the non-banking financial sector. According to the study, market crises could be significantly amplified due to massive asset sales by pension funds, hedge funds and other investment institutions.
Main findings of the report
The BoE warns that a sudden rise in sovereign and corporate bond yields, triggered by geopolitical tensions, could lead to significant losses at non-banking institutions. This could trigger asset sales that amplify market shocks.
Among the notable concerns is the possibility of the corporate bond market and the repo market (where funds are raised against assets such as gilts) facing liquidity problems.
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The scenario explored included the hypothetical bankruptcy of a hedge fund, modeled by more than 50 financial institutions in London. This exercise reflects a shift in regulatory focus toward risks outside the traditional banking system.
Governor Andrew Bailey’s Remarks
BoE Governor Andrew Bailey highlighted that the exercise “revealed significant discrepancies in the expectations of market participants.” Although some areas, such as money market funds and pension funds with liability-driven investment (LDI) strategies, showed comparatively high resilience, critical risks remain.
Bailey highlighted the potential impact of trade tensions, especially with Donald Trump’s administration threatening to increase tariffs on imports. This could weigh on global economic growth, increase volatility in financial markets and generate disruptions in cross-border capital flows.
Interconnection between private capital and insurance
The report also addressed concerns about the growing relationship between private equity and insurers, driven by large equity groups such as Apollo Global Management and KKR. Although these relationships offer low-cost, long-term financing, the BoE warned that the complexity and lack of transparency in these arrangements could increase the fragility of the insurance sector and generate systemic risks.
Banking stress test results
Along with the study on the non-banking sector, the BoE published the results of its banking stress tests. UK banks have proven prepared to withstand two severe crisis scenarios, prompting the central bank to conduct these tests every two years rather than annually.
Final reflection
The BoE report highlights the growing relevance of the non-banking financial sector and the need to strengthen its regulation to avoid systemic risks.
As financial institutions seek higher returns, it is crucial to balance innovation with stability, especially in a global economic environment marked by geopolitical tensions and regulatory challenges.
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