The Bank of England’s (BoE) Financial Policy Committee (FPC)has backed plans to implement stress tests for investment funds and asset managers to evaluate the UK's financial stability beyond the core banking sector.
In its latest Financial Stability Report, the committee said that the recent rapid growth in open-ended funds, and their continued investment in less liquid assets, has increased the risk of impairing overall market liquidity, which is already fragile.
The stress tests will include a desk-based simulation exercise, which will assess the resilience of markets to large-scale fund redemptions. This intends to make fund investors aware of the potential for funds to use exceptional liquidity management tools in stressed market conditions. This could reduce investment in less liquid assets during an upswing, and minimise the probability of a sudden reappraisal of liquidity risk.
In addition to this, the Financial Conduct Authority (FCA) is planning to assess investor awareness of the liquidity risks associated with investment funds by conducting a market study.
Commenting on the latest report, Nick Fienberg, director at Alpha FMC, said: "Like the larger banks the larger asset management firms are systemically important, so it should come as no surprise that the Bank of England has become the latest regulator to suggest stress tests for the industry. The question remains what these tests might look like and how the results would be measured."
Stress tests are already in place for banks, a move which has proved successful in highlighting what the biggest struggles would be if there were to be a critical change in the global financial market. This has given banks the opportunity to amend their capital plans and become more resilient.