London: The Bank of England said global investors are reining in their appetite for risk sharply due to turmoil in the financial system, and that more than half of respondents to a survey early this year are braced for a “high-impact” event.
The findings in the central bank’s assessment of risks to the financial services industry indicate the UK banking system is in a robust condition to respond to a wide variety of scenarios. For the first time, it called for LDI funds to be prepared for a yield shock of 250 basis points after the turmoil last autumn.
The remarks are the BoE first official assessment of UK financial conditions since the collapse of Silicon Valley Bank and Credit Suisse Group. It also showed some calm returning to markets after a corner of the UK pensions market seized up late last year following a jump in interest rates.
The findings of the survey, done before the banking meltdown, contrast with BOE Governor Andrew Bailey’s comments before lawmakers on Tuesday where he expressed confidence a new crisis isn’t about to strike - even though he acknowledged that markets are testing the banks for weakness.
The BoE warned for the first time that private-equity owned and highly-indebted companies may struggle to refinance their debts as rising interest rates force investors to make sharp changes in the way they value assets.
It said hedge funds have amplified volatility in interest rate markets by trying to reduce their exposure as authorities rescued two major institutions.
“Riskier corporate borrowing is particularly vulnerable to tighter financial conditions” and “heightened geopolitical risks increase the likelihood of financial vulnerabilities crystallizing,” the BOE report release Wednesday said.
High-yield bonds, leveraged loans and credit markets have almost doubled in size in the past decade. A severe reduction in the risk appetite of investors may now “result in refinancing challenges.” The BOE said commercial real estate is a particular risk.