November 2023

On 10 November, the Bank of England (BoE) launched the scenario phase of its System-wide Exploratory Scenario (SWES). The SWES was announced in June 2023 with the aim of improving the BoE's understanding of system-wide stress impacts and in particular the contribution of market-based finance. The hypothetical scenario reflects a `sudden, sharp shock to global financial markets due to sudden crystallisation of geopolitical tensions'.


The SWES exercise forms part of the Financial Policy Committee's (FPC's) medium-term objective to further improve risk identification in, and the functioning and resilience of, market-based finance (the system of equity and debt markets, non-bank financial institutions (NBFIs), and financial infrastructure). The SWES differs from usual stress tests in that its purpose is not to test of the resilience of the individual participant firms. Rather, it is concerned with system-wide linkages and is more macroprudential in focus. For more on the background to the SWES, see our previous article here

The BoE has provided a full list of participants here.  

Key features and progression of the scenario

The BoE describes the scenario as comprising `a sudden, sharp shock to global financial markets due to sudden crystallisation of geopolitical tensions. Rates and risky asset prices move sharply, and these moves persist'. It notes also that the shock `is amplified by the financial sector, counterparty credit risk becomes elevated, and eventually crystallises'.

The aggregate shock in the hypothetical SWES scenario is designed to be more severe than observed during the March 2020 `dash for cash' or the September/October 2022 LDI episode. The individual shocks in the scenario are also generally faster, wider ranging, and more persistent than in these events.

The stress scenario phase of the SWES will comprise two rounds:

  • Banks, insurers and fund managers will first be asked to model the impact of the shock and their intended actions in response to it. The BoE will then assess how the scenario may be affected by their collective actions.
  • The BoE will then ask how an updated scenario, which takes into account any potential amplification effects, might lead them to take different actions.

CCPs will be asked to provide data on margin calls implied by the scenario to help the BoE understand the liquidity impact.

The SWES scenario develops as follows:

  • Day 1 — 40% (of 10-day shock) realised:
    • Crystallisation of geopolitical tensions
    • Markets de-risk
    • Sovereign wealth fund sells government bonds
  • Day 2 — 55% realised
    • Geopolitical situation worsens
    • Some relative value hedge funds de-risk
    • Sovereigns on negative watch
  • Day 3 — 75% realised
    • Counterparty credit risk heightened
    • Rumours of delayed margin payments
    • Sovereign wealth fund continues selling

  • Day 4 — 85% realised
    • Hedge fund defaults
    • Market participants sell collateral
    • Funding market activity limited

  • Day 5-10 onwards — 100% realised
    • Tensions high, situation unstable
    • Prices do not retrace, volatility high
    • Sovereign downgrades

Implications for firms

The BoE will publish system-wide, aggregated findings towards the end of 2024. Interim results may also be shared via regular communications such as the Financial Stability Reports. No information on individual firms (or commercially sensitive information) will be shared. 

Firms should note that the SWES scenario is a tool to allow the BoE to explore the impact of a hypothetical shock on a range of financial market participants, in particular to enhance its understanding of the risks to and from NBFIs, the behaviour of NBFIs and banks in a stress, including what drives the behaviours. It is not a forecast by the BoE and does not represent the BoE's expectations of the consequences for financial markets of any particular shock. It is also not intended to forecast the consequences of any one shock, including any specific geopolitical development. 

Although the goal of the exercise is not to test the resilience of individual firms or funds, the BoE will likely use the results of the SWES as an additional input into its policy work on the non-bank sector, including open-ended funds and CCPs. With this in mind, participants and observers are advised to pay close attention to the BoE's communications and findings as they may well indicate the future regulatory direction of travel.

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