In a recent report, the Bank of England’s (BoE) Financial Policy Committee (FPC) warned on several vulnerabilities in the system of market-based finance (MBF), which remain significant.
These include:
- liquidity mismatch in money market funds and open-ended funds;
- leverage in non-bank financial institutions, for example in LDI funds and the US Treasury cash-futures basis trade;
- liquidity demands from margin calls in times of stress; and
- the capacity of markets to intermediate in stress, so-called jump-to-illiquidity risk.
“These vulnerabilities could crystallize in the context of the current environment of elevated and volatile interest rates, amplifying any tightening in financial conditions. That said, MBF has so far been broadly resilient to recent market volatility and higher interest rates,” the FPC wrote in the report.
