Bank of England: Non-Banks Could Pose New Risks to Financial Stability

Non-bank financial institutions like pension funds, insurance companies, hedge funds and money market funds could present risks to financial stability as their role in the financial system grows, Dave Ramsden, deputy governor, markets and banking at the Bank of England, said Monday (Dec. 9).

In a speech given at the Official Monetary and Financial Institutions Forum in London, Ramsden said non-bank financial institutions account for about half of the total assets in the financial systems of both United Kingdom and the world amid a continuing shift in consumer and business savings and borrowing habits — a transition he said he would pick out as “one theme to describe 2024.”

“There are potential benefits to that shift, by increasing the range of intermediation channels, reducing concentration and improving risk sharing, but we have also noted how non-banks can pose new forms of liquidity risks to financial stability in the context of the post global financial crisis era,” Ramsden said.

Ramsden also said in his speech that the absence of financial instability seen in 2024 does not mean lasting stability has been achieved.

He added that he gave a speech at this time last year noting the failures of Silicon Valley Bank and Credit Suisse, and a speech a year earlier about the “significant shocks” that struck the U.K. economy in 2022.

Amid this year’s relative stability, it’s important not to get complacent, because “the comparatively calmer market conditions of this year could lead to greater risk-taking in future,” Ramsden said.

“We must continue to be vigilant in light of increasing uncertainty around the outlook, by effectively monitoring and assessing risks present in U.K. financial markets, and utilizing our balance sheet when it is appropriate to do so,” Ramsden said. “Getting the balance right in our balance sheet operations should help us to maintain financial stability and, in doing so, lay the foundations for sustainable growth.”

The Bank of England said in November that it aims to develop the ability to lend to non-bank financial institutions to address potential liquidity challenges in core financial markets that could threaten the U.K.’s financial stability.

In a final report on its systemwide exploratory scenario exercise, the central bank said it found that while non-bank financial institutions have become more resilient in recent years, that could change over time, and those changes could be amplified by the financial system as a whole.