26 February 2024

FT's Noonan: Bank of England deputy governor calls for more research into non-bank lenders

Bank of England deputy governor Sarah Breeden has called for more research into non-bank lenders to stave off a “credit crunch” that could be triggered by a retreat of hedge funds, pension funds, insurers and asset managers. “A shift in the willingness of market-based finance to lend to corporates, particularly those perhaps that are highly leveraged, would have significant implications for the real economy — a credit crunch sourced in market based finance rather than bank lending,” Breeden said on Monday.

Speaking to a gathering of academics and researchers at a BoE conference in London, Breeden added she was “particularly interested” in research that identified risks in the broader non-banking sector. She said more research would help the BoE to act ahead of time rather than after risks emerged, as happened during the 2022 liability-driven investing (LDI) crisis, when UK pension funds were forced to sell off gilts in 2022, sending the price of gilts spiralling. “Assessing the risk in market-based finance is challenging,” Breeden said, noting the “complexity and interconnectedness of sectors”, while acknowledging that “activities markets and participants make it difficult to identify risks and predict how they might transmit through the system”.

The BoE is currently working on its inaugural review of how financial markets function under stress, dubbed its “system-wide exploratory scenario”. The assessment aims to examine 50 institutions to assess how they would respond to potential shocks. As global regulators’ fears over non banks have risen in recent years, parts of the industry have hit back at the prospect of being regulated like banks, arguing that they face distinct risks and perform a vital function. ...

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