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Regulators need broader oversight of financial firms to prevent a crisis in the vast non-bank sector wreaking havoc on the economy, Britain's central bank said on Monday.
The Bank of England was forced to step in and buy UK government bonds in September 2022 after Prime Minister Liz Truss unveiled unfunded tax cuts, sending yields soaring and leaving liability-driven investment funds scrambling to find extra collateral to cover positions.
That bruising experience made it more determined to shine a light on 'non-banks' like insurers, pension schemes, asset managers and funds that now make up about half of global financial assets but are less regulated than lenders, particularly when providing credit.
The central bank has launched a stress test to harvest data on links between banks and the non-bank financial intermediation (NBFI) to help convince international regulators to take joint action.
BoE Deputy Governor Sarah Breeden said on Monday that further research was needed to identify gaps in the data and increase resilience in a sector that provided nearly all of the 425 billion pounds ($538.99 billion) net increase in UK business lending since 2008.
"These gaps in our knowledge has meant that we have been largely building resilience in market-based finance in response to crises, whereas we should be looking to build resilience ahead of vulnerabilities crystalising," Breeden told a BoE event.
"Work which develops our understanding of the risks and interconnections of the system should help us to build a proactive case for policy action on NBFI before stress crystalises," she said.
Central banks have faced resistance from investment funds, and even some securities watchdogs, over regulating market-based firms that offer credit.
One way to overcome this would be to use capital and liquidity rules to influence how banks, which central banks regulate, interact with non-banks.
The BoE has set out tougher liquidity guidance for LDI funds and money market funds, but it needs parallel EU action to be fully effective given many of the funds are listed there.
The U.S. Treasury-led Financial Stability Oversight Council in November agreed to ramp up oversight of non-banks, triggering a backlash from big funds who bristle at the prospect of bank-like rules.
Separately on Monday, the G20's Financial Stability Board said it was pursuing a comprehensive work programme to enhance non-bank liquidity resilience, and will deliver a progress report in July.
($1 = 0.7885 pounds)
(Reporting by Huw Jones; editing by Christina Fincher)