Question to the HM Treasury:

To ask His Majesty's Government, further to the Written Answer by Viscount Younger of Leckie on 27 October (HL2608), what are the major vulnerabilities in the non-bank sector in the UK that they have identified over the last five years.

The Bank of England’s Financial Policy Committee (FPC) is responsible for identifying, monitoring, and taking action to address systemic risks and improve the resilience of the UK financial system, including for non-banks. In March 2020, HM Treasury asked the FPC to conduct a detailed assessment of the risk oversight and mitigation systems for non-banks, which was published in July 2021.

The Bank and FPC have undertaken significant other analysis of the non-bank system including reviews into the involvement of non-banks in March 2020 dash for cash pressures and liquidity management practises in funds. The non-bank sector is frequently covered in the FPC’s bi-annual financial stability reports with the next report scheduled for December 2022.

Bank and FPC reporting has highlighted that vulnerabilities or activities within non-banks can amplify and transmit shocks to the wider financial system. For example they have previously highlighted, large increases in margin requirements, excessive fund redemptions, or a forced unwinding of leveraged positions as actions which can all create liquidity pressures within non-banks. These pressures can then be passed onto the wider system through actions such as large asset sales, redemptions from other funds, or through counterparty default risks. Additionally, the supply of market liquidity often retreats during stress events reducing the market’s ability to absorb these without adverse effects.

The FPC report published in July 2021 also noted that gaps in data availability, including between jurisdictions, can constrain the ability of regulators to monitor the sector and for market participants to efficiently price in risk.

HM Treasury agrees with the characterisation of risks in the non-bank sector by the FPC and its report supports recent work by international bodies such as the Financial Stability Board (FSB). The FSB has recently published its 2022 progress report to the G20 on its work to enhance the resilience of non-bank financial intermediation. Maintaining a global approach to the non-bank sector is important given the international nature of the financial system.

As members of the FSB, HM Treasury and UK regulators have worked with international partners to identify and address vulnerabilities in non-bank financial intermediaries over the past two years and will continue to do so in 2023. This has included workstreams on money market funds and open-ended funds to date, with work planned to improve the resilience of margin practices and non-bank leverage.