The Bank of England (BoE) is to look again at bond market liquidity by testing the asset management industry's ability to withstand a potential shock in the corporate debt market.
The central bank is to publish a paper next week which will study liquidity in the European corporate bond market, specifically with regard to corporate bond funds.
The paper, titled 'Simulating stress across the financial system: resilience of corporate bond markets and the role of investment funds', will be published on Wednesday July 12. The work, conducted by the central bank's Financial Policy Committee (FPC), aims to fully understand what would happen in event of stressed liquidity or a fire-sale environment.
The FPC had previously sought to test bond funds' resilience in stress tests held in 2015. The BoE itself first started probing bond fund liquidity in 2011.
International bodies such as the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) have also sought to investigate the sector. The regulators have looked at how fund firms affect financial stability, and how their day-to-day operations may impact markets.
The FSB - chaired by BoE governor Mark Carney - last year made 14 recommendations for asset managers in a bid to limit the potential systemic risks arising from fund groups and their portfolios.
Fund firms have often argued they do not pose risks to financial stability on the basis they are merely stewards of capital. They have thus far successfully staved off attempts to be labelled as 'systemically-important financial institutions' by the FSB.
Such a label, which has been placed upon large banks and insurance companies, would require firms to hold capital buffers in order to reduce the chances that the collapse of a business produces system-wide pressures.
