British regulators emphasised the necessity for broader supervision of financial institutions to avert a potential crisis within the expansive non-bank sector from evolving into a credit crunch, thus wreaking havoc on the economy, as stated by Britain’s central bank on Monday.
The Bank of England intervened by purchasing UK government bonds in September 2022, subsequent to Prime Minister Liz Truss’s announcement of unfunded tax cuts.
This move propelled yields upwards, leaving liability-driven investment (LDI) funds scrambling to secure additional collateral to cover their positions.
This ordeal spurred the Bank of England to intensify efforts in illuminating the activities of “non-banks” such as insurers, pension schemes, asset managers, and funds.
These entities now constitute approximately half of global financial assets but face less regulation compared to traditional lenders, particularly in their credit provision activities.
To address these concerns, the central bank initiated a stress test to gather data on the connections between banks and the non-bank financial intermediation (NBFI) sector.
This endeavour aims to persuade international regulators, notably securities watchdogs responsible for market regulation, to collaborate in taking decisive action.
BoE Deputy Governor Sarah Breeden underscored the necessity for further research to identify data gaps and bolster resilience within a sector that has accounted for nearly all of the £425 billion ($539 billion) net increase in UK business lending since 2008.
Claudio Borio, head of the monetary and economic department at the Bank for International Settlements, stressed the need for a regulatory framework tailored to the unique characteristics of non-banks.
Borio highlighted that progress in this regard has been hindered by the absence of financial stability within the mandate of securities regulators.
Addressing these challenges, a central banker suggested employing capital and liquidity regulations to influence the interactions between banks, which are under central bank regulation, and non-banks.
Meanwhile, the BoE has outlined stricter liquidity guidelines for LDI funds and money market funds.
However, full efficacy necessitates parallel action from the EU due to the significant presence of such funds within its jurisdiction.
Furthermore, the U.S. Treasury-led Financial Stability Oversight Council, in November, concurred on enhancing oversight of non-banks.
This move garnered opposition from major funds apprehensive of bank-like regulations.
Simultaneously, the G20’s Financial Stability Board disclosed its commitment to a comprehensive programme aimed at bolstering non-bank liquidity resilience, with a progress report slated for delivery in July.