On 10 October 2023, the Bank of England (BoE) published Financial Stability in Focus (FSIF): The FPC’s approach to assessing risks in market-based finance.

This latest edition of the FSIF sets out the Financial Policy Committee’s (FPC’s) approach to assessing risks in market-based finance (MBF) and ways it intends to develop this approach. It is intended to support the FPC’s medium-term priority to further improve risk identification in, and the functioning and resilience of, MBF.

The FSIF explains that, under its risk assessment framework, the FPC considers a range of vulnerabilities in MBF sectors (such as liquidity and maturity mismatch, and leverage) and market features (such as interconnectedness and concentration) that make these sectors and markets susceptible to shocks. It uses specific plausible risk scenarios to identify how these vulnerabilities and features might interact and propagate through the system to threaten financial stability.

It also notes that where the FPC identifies material vulnerabilities, it considers how resilient sectors and markets are to shocks given these vulnerabilities. Absent sufficient resilience, the FPC seeks to take action, where possible, to remove or reduce risks to financial stability by building resilience in the system. Resilience standards, and macroprudential policy more generally, aim to prevent such systemic risks that lead to disruption to the provision of financial services. 

The FSIF also sets out some of the ways in which the FPC is continuously seeking to extend its approach, which include:

  • Enhancing and reviewing how it prioritises risk assessment and policy development, given the breadth of issues in MBF.
  • The system-wide exploratory scenario exercise is an important step in building the FPC’s capability for system-wide analysis.
  • Considering the potential role for macroprudential tools, including where additional resilience standards may be needed for non-bank financial institutions.
  • Setting out how and well it will act domestically or internationally. International policy is crucial to reducing vulnerabilities in MBF, but the FPC will also act domestically, where effective and practical.
  • Working with the BoE to ensure it has the tools to address dysfunction in MBF. The FPC flags that it is vital that firms make progress on building their resilience to vulnerabilities as a counterpart to central banks developing new tools to support markets during periods of severe dysfunction.

The FPC welcomes feedback from interested parties on its approach to assessing and mitigating financial stability risks associated with MBF, and how it might be refined. BoE staff will seek to engage with interested parties over the coming months on the contents of this FSIF.