The Bank of England has launched its first system-wide exploratory scenario (SWES) exercise, which aims to improve understanding of the behaviours of banks and non-bank financial institutions (NBFIs) in stressed financial market conditions.

The exercise will explore how those behaviours might interact to amplify shocks in UK financial markets. Participating firms will include large banks, insurers, central counterparties and a variety of funds (pension funds, hedge funds, and funds managed by asset managers). Participants will be actively engaged in both the design and execution of the exercise.

The Bank says recent events have shown that market-based finance (MBF) has been increasingly prone to sudden liquidity stresses during periods of market volatility, citing the March 2020 ‘dash for cash’ and the adverse gilt dynamics seen in September 2022, which required Bank intervention.

Participants will be asked to evaluate the impact of a severe but plausible stress to global financial markets and consider what actions they would take in response to the scenario, with a focus on behaviours in UK financial markets.

The Bank will publish the full list of participants and details of the stress scenario later in the year and the final report will be published in 2024.