Central banks need to monitor non-bank risks more – Bailey

Central banks need new surveillance and liquidity provision tools to address the increasingly important non-bank sector, the Bank of England (BoE) governor has said.

Speaking at the Bloomberg Regulatory Forum in New York on October 22, Andrew Bailey noted that there had been a shift in financial intermediation towards non-banks. This, he said, was partly a result of the increased scrutiny of traditional banking following the global financial crisis.

He emphasised that regulation alone would not be enough to address the financial stability risks in non-banks, and that there should be adequate surveillance and liquidity provision tools. He added that surveillance should focus on the interaction between the banking and non-banking sectors.

Bailey cited as an example the BoE’s system-wide exploratory scenario. This was announced last year as a first-of-its-kind stress test to examine how shocks could flow through both the banking and non-banking segments of the financial system.

“We need to develop more of these tools of surveillance of risks,” the governor said.

The stress test is currently in the second round of its scenario phase. Details of the first round were published in the BoE’s June 2024 Financial Stability Report.

Bailey expected the BoE to report on the results of the stress test by the end of this year.

On liquidity tools, the governor said central banks should consider offering emergency facilities for non-banks. He explained that during times of stress, non-banks might not receive the liquidity they would typically get from banks, and that central banks should therefore intervene.

Bailey mentioned that the BoE had been planning such an avenue for intervention. In July, the central bank announced that its emergency liquidity facility for non-banks should become available in the final quarter of 2024.

However, Bailey emphasised that these emergency tools should not be standing facilities.

“Non-banks cannot decide when they would like access to the central bank,” he said. “Rather, the central bank can trigger or activate these facilities if it senses stressed conditions and [if] their possible economic consequences warrant such action.”