The Bank of England (BoE) believes that British banking institutions are resilient to external shocks despite limited short-term global economic growth prospects and still high inflation, but calls for strengthening liquidity in non-bank finance.
According to its report, financial market participants believe that interest rates are likely to remain high for a long time, which is reflected in recent increases in yields on long-term Treasury bonds (gilts).
However, certain parts of the financial system can be weakened by the tensions generated by high interest rates, argues the bank.
But it believes that the domestic banking sector is well capitalized, supported by strong recent profitability and has high levels of liquidity, and therefore able to withstand substantially worse economic and financial conditions than expected.
In a survey of banking institutions, computer attacks, inflation and geopolitical threats remain the most present, also indicates the BoE.
The central bank, however, once again calls for vigilance on non-bank financial players, whose level of vulnerability it considers unchanged since its last assessment in July.
Less regulated than the big banks, these players can be the source of significant shocks. In September 2022, the cost of very long-term British debt had soared in the crowd of very expensive and unquantified budget announcements from the short-lived government of Liz Truss.
The BoE then intervened by purchasing bonds to avoid a shock amplified by the lack of liquidity in this market dominated by LDI (liability driven investments) funds, linked to British pension funds.
Its analysis on Tuesday suggests that in the case of sterling money market funds (MMFs), weekly chance liquid asset levels around 50-60% of their assets would ensure high resilience to severe but plausible risks. .
Most funds in this sector, which is worth 250 billion pounds, currently have liquidity levels above 40%, according to the BOE.
Since the great financial crisis of 2008, central banks have imposed resistance tests or stress tests on the largest banking establishments, which in theory make it possible to establish to what extent they would withstand major financial shocks.