Over the past two years, the Bank of England has raised its key interest rate from 0.1% to 5.25%, with the US Federal Reserve and the European Central Bank taking similar steps.
Concerns are also exacerbated by the high levels of debt accumulated by both governments and companies. Noel Quinn, chief executive of HSBC, warned of a potential “global reckoning” as debt mounted.
Risks that could lead to a major shock are also increasing.
Jamie Dimon, chairman and chief executive of JP Morgan, recently told the Sunday Times: “Geopolitics are very serious – arguably the most serious since 1938.”
“My biggest fear is that there will be another geopolitical escalation – and this could happen very quickly – and that the markets will at some point unwind,” Christian Sewing, Deutsche Bank’s chief executive, said at a conference hosted by the Hong Kong Monetary Authority. Quiet and then you have a market event.”
Under the bank’s new system-wide exploratory scenario (SWES), more than 50 institutions, including banks, insurance companies, pension funds, asset managers, hedge funds and counterparties, would be exposed to a hypothetical global shock “of similar severity to the 2007/08 shock”. The global financial crisis”.
The Bank of England said the speculative scenario identifies “severe, but plausible pressures” that are “faster, broader and more persistent than those seen in recent periods of market instability, such as the March 2020 ‘run for cash’.” and the September/October 2022 LDI episode, which includes a ten-day shock to rates and risky asset prices.
Participating institutions will have to explain how they will respond to a 1.15 percentage point increase in yields on 10-year government bonds, “similar to the move seen during the LDI episode.”
In the squeeze scenario, “the rise in 10-year US Treasury yields is on par with the steepest rise since 2000, at about 75 basis points.”
That would be combined with a 1.3 percentage point increase in investment-grade corporate bond yields, “as much as we saw during the March 2020 cash rush” when markets ground to a halt at the start of the pandemic.
Financiers must submit their responses to the bank in January, explaining how they will react to the crisis.
This will be followed by a subsequent round of analysis to examine the implications of these measures across the financial system.
The bank will publish the final results by the end of next year, to assess the resilience of the financial system as a whole, rather than determining the performance of any individual company.