The Bank of England has launched a scenario-based probe into how liquidity reacts, and can dry up, in stressed market conditions with the emphasis on how not just banks, but non-banks, hedge funds and insurers react.

The BOE is asking a sample of large banks and non-bank financial institutions about how they would likely react to plausible market stresses, with the inquiry inspired by the liquidity shocks seen following the Covid shock and last September's Liquidity Driven Investment debacle following the mini-Budget. It aims to break new ground by combining detailed responses from financial institutions to accompany system wide modelling.

The inquiry is starting this month with a view to publishing the results in the second half of 2024, with the hope that the inquiry will in itself drive market participants to plan better and think more clearly about their response to shocks and the circumstances under which they will continue to provide liquidity. The probe should show up which parts of the financial system are most vulnerable to liquidity shocks, with credit and gilt market repos all in the spotlight.