BOE sees liquidity dangers as Greece threatens market stability

By Ben Moshinsky

The Bank of England will assess the danger from a shortage of market liquidity as it warned of threats to financial stability from events such as the crisis in Greece.

In a quarterly assessment published Thursday, the BOE?s Financial Policy Committee also said geopolitical tensions, slowing Chinese economic growth and emerging markets also remain a threat to U.K. stability.

?The committee remains concerned that investment allocations and pricing of some securities may presume that asset sales can be performed in an environment of continuous market liquidity,? it said. ?Liquidity in some markets may have become more fragile.?

With potential market stresses related to events in Greece and elsewhere, BOE officials have been raising the alarm about low liquidity in recent months. Executive Director Chris Salmon said that structural changes in financial markets may impair liquidity and leave them less able to absorb shocks.

In its analysis, the FPC noted that even small events are rippling through markets. It said trading volumes in some sovereign bonds, including U.S. Treasuries ?appear to suggest that sudden changes in market conditions can occur in response to modest news.?

As a result, the FPC called on the BOE and the Financial Conduct Authority, which oversees markets, to jointly assess where vulnerabilities lie and how fund managers and other investors intend to cope with potential shocks. This review, to be completed by September, will see asset managers questioned about their strategies and holdings.

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