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​Bank of England sees 'merit' in stress test for pensions sector

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The Bank of England has praised the European Insurance and Occupational Pensions Authority’s (EIOPA) recent pension stress testing, noting the “merit” in developing a stress test for the wider financial sector.

In a report on its plans for banking sector stress testing, the UK’s central bank discussed the possibility of stress tests for the wider financial system.

It noted that the use of stress tests had increased “substantially” since the 2008 financial crisis and had already been conducted for the banking sector, general and life insurers.

“Consideration is also being given to supervisory stress tests of other sectors,” the report continued, noting the possibility that central counterparties (CCPs) could be subject to further investigation.

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Benoît Cœuré, a member of the European Central Bank’s executive board, has previously spoken of the need for CCPs to be “exceptionally robust”, while financial stability commissioner Jonathan Hill has promised to work with the US on a resolution framework for the industry.

The report went on to note recent pension fund stress tests conducted by EIOPA, which concluded in August and said that such exercises were becoming increasingly important for macro-prudential policy.

“The Bank believes there is merit in seeking to develop tools for stress testing the UK financial system as a whole,” it said. 

It argued that such a wider stress test would be in line with its financial policy committee to monitor financial stability risk beyond the banking sector.

It added that any wider-ranging stress test would examine not an individual company’s ability to withstand shocks but rather broader systemic risks and how these might impact providers in the UK.

Pension funds would be captured by the proposed stress test, as any change in their “willingness” to hold certain assets could lead to declining asset prices, which would in turn impact other market participants.

The Financial Stability Board (FSB), chaired by Bank of England governor Mark Carney, recently suspended work on regulation for asset managers and the systemic risk posed by the sector.

During the FSB’s consultation, asset managers were critical that parts of the pension sector were not captured by the Board’s definition of systemically important financial institutions.

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