On 19 June 2023, the Bank of England (BoE) launched its first system-wide exploratory scenario (SWES) exercise.

The SWES exercise aims to improve the BoE’s understanding of the behaviours of banks and non-bank financial institutions (NBFIs) in stressed financial market conditions and how those behaviours might interact to amplify shocks in UK financial markets that are core to UK financial stability. In particular, it is not a test of the resilience of the individual firms that have been asked to participate. Instead, its focus is system-wide, including on important UK financial markets and their resilience in times of stress.

In recent years, events in a number of global markets have illustrated how liquidity conditions can quickly deteriorate – underlining some of the vulnerabilities in market based finance. In light of these events, the BoE has requested that a group of banks and NBFIs who are active in UK financial markets participate in a collaborative SWES exercise aimed at:

  • Enhancing understanding of the risks to and from NBFIs, and the behaviour of NBFIs and banks in stress, including what drives those behaviours.
  • Investigating how these behaviours and market dynamics can amplify shocks in markets and potentially pose risks to UK financial stability.

The first phase of the SWES exercise concerns initial information gathering. In a second ‘stress scenario’ phase later in 2023, the BoE plans to ask banks, insurers, funds and central counterparties to evaluate the impact of a severe but plausible stress to global financial markets – this phase will have two rounds, to enable the BoE to account for system-wide interactions and amplification effects.

The BoE anticipates publishing a report to conclude the SWES exercise in 2024.