The Bank of England has launched its first system-wide liquidity ‘stress test’ to establish how big banks, insurers, clearing houses and investment funds respond collectively during extreme stresses in markets, it said on Monday.

The Bank of England had said in December that investment funds and other non-bank financial institutions would face their first ‘stress test’ to apply lessons from the near-meltdown in Britain’s pension fund sector in September.

“The launch of this exercise will provide valuable insight into the system-wide dynamics for banks and non-banks following a severe but plausible stress to financial markets,” BoE Deputy Governor Jon Cunliffe said in a statement.

Liability-driven investment (LDI) funds, used by pension funds to ensure their long-term payouts, struggled to meet collateral calls after turmoil caused by the fiscal plans of Liz Truss’s short-lived government in September. The BoE had to step in to buy government bonds to stabilise markets.

Money market funds also came under “dash-for-cash” pressure during market stresses following economy lockdowns to fight COVID-19 in 2020.

The BoE has long run separate stress tests of individual banks and insurers to help determine correct capital buffers, but this is the first financial-system wide test, with the bank saying results are expected in the second half of next year to help manage risks better.

The test, the first of its kind globally and which includes hedge funds and pension funds, will focus on UK government bond and repo markets, sterling corporate bond markets and associated derivatives markets, the BoE said.

“The exercise is not a test of the resilience of the individual firms participating. Published materials will not provide information on any individual firms.”

The test will ask firms to show how stresses such as heavy redemptions from investors or rocketing margin calls from clearing houses affect liquidity, amplify shocks and threaten financial stability.

The test is the latest sign of how central banks are seeking a grip on the huge non-bank sector that now plays a key role in funding the economy, often involving leverage and bank-like activities such as lending.

Meanwhile the average two-year fixed mortgage rates for home buyers in Britain hit 6.01 per cent on Monday, property data provider Moneyfacts said, taking the key borrowing cost for the housing market to its highest since December 2022.

The rate stood at 5.98 per cent on Friday, Moneyfacts said.

The Bank of England is expected to raise its borrowing costs for a 13th time in a row on Thursday as it seeks to tackle stubbornly high inflation. The increase in rates has slowed Britain’s housing market and much of the impact on mortgage-holders is yet to be felt.

The BoE said in May that 1.3 million fixed-rate mortgages were still to mature before the end of 2023, and more are up for renewal in 2024 and beyond.

Moneyfacts said the average five-year fixed rate increased to 5.67 per cent on Monday from 5.62 per cent on Friday.

Meanwhile Britain’s Financial Conduct Authority (FCA) has restricted the movement of cash and assets from Odey Asset Management to restore order at the firm after the removal of founder Crispin Odey, the Financial Times reported.

The markets regulator will publish details of voluntary restrictions agreed with Odey Asset Management on Monday, the FT reported on Sunday. The FCA and Odey Asset Management declined to comment on the report when contacted by Reuters.

The hedge fund has been grappling with investor flight since the FT and Tortoise Media on June 8 jointly reported allegations by 13 women that Crispin Odey had sexually assaulted or harassed them over a 25-year period. Odey has denied the allegations.

Lawmakers on the Treasury Select Committee sent a letter to the FCA on Wednesday to question the regulator’s supervision of Odey Asset Management and its founder.