MNI BRIEF: BOE Sets Out Bank Test Geo-Political Shock Scenario

The Bank of England has published the details of its system wide exploratory scenario (SWES), outlining the first 10 days of a geo-political shock, which sees a sharp deterioration in the economic outlook and asset prices taking a faster and more sustained hit than in either the Covid March 2020 dash-for-cash or the September/October 2022 Liability Driven Investment shock.

The Bank's aim is to assess the responses of non-bank financial institutions and banks to the SWES to see how the former's liquidity needs would change and whether banks would continue to intermediate. It could also lead to policy changes as and when it sees gaps in the financial system safety net.

The BOE, in response to the LDI and Covid shocks, is developing lending tools for non-bank financial institutions and aiming to fill in a 'liquidity map' and the SWES should help fill-in some of the detail of where liquidity shortages would occur. https://www.bankofengland.co.uk/speech/2023/septem...

The BOE was non-specific about the nature of the geo-political shock, simply detailing the size of the hit.