1. Part B: Resilience of the UK financial system – Market based finance

2. Chart B.10 Market-based finance is an important component of the UK financial system
UK non-bank financial institutions’ balance sheet assets
Sources: AFME, Bank of England, FCA, Morningstar, ONS and Bank calculations.
Includes money market funds.
Bank holding companies data start in 2010.
Other includes real estate investment trusts, finance companies and statistical discrepancies (between bottom-up categories listed — except pension funds and insurance companies — and top-down aggregate ONS data for other financial intermediaries — OFIs). Work is under way at the Bank and ONS to identify further components of this category and to reduce the size of the residual.

3. Chart B.11 Sterling investment-grade issuance by UK companies picked up sharply in August and September
UK PNFCs’ cumulative gross bond issuance(a)(b)
Sources: Dealogic and Bank calculations.
Issuance by: PNFCs incorporated in the United Kingdom; PNFCs’ finance vehicles, whose parent operates in the United Kingdom; and special purpose vehicles, where the parent is a PNFC operating in the United Kingdom. Excludes deals guaranteed by a foreign parent.
Includes medium-term notes, which are classified as investment-grade bonds unless rated BB+ or lower.
In September, Shire Plc, a UK pharmaceutical and biotech company, sold US$12.1 billion of debt via its Irish finance vehicle to lock in low borrowing costs and to fund its takeover of the US group Baxalta — one of the biggest issues of the year. Shire was established in the United Kingdom but its operational headquarters are in the United States, with UK workforce accounting for less than a tenth of its 5,500 staff globally.

4. Chart B.12 Dealers’ leverage ratios remain high
Dealers’ leverage ratios(a)(b)
Sources: Banks’ published accounts, SNL Financial, The Banker Database and Bank calculations.
Leverage ratio defined as reported Tier 1 capital (or common equity where not available) divided by total assets, adjusted for accounting differences on a best-endeavours basis. This accounting measure differs from regulatory leverage ratios.
Dealers included are Bank of America Merrill Lynch, Barclays, BNP Paribas, Citigroup, Credit Agricole, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JP Morgan, Mitsubishi UFJ, Morgan Stanley, RBS, Société Générale and UBS. Pre-crisis data also include Bear Stearns, Lehman Brothers and Merrill Lynch.

5. Chart B.13 Repo market activity has fallen in recent years, particularly in the United Kingdom and United States
UK, US and European government repo market activity(a)
Sources: Bank of England, ICMA, SIFMA and Bank calculations.
Includes both repo and reverse repo.
Pre-2013 US data is approximate due to less detailed data set.
European government repos include those backed by the central government of Austria, Belgium, Denmark, Finland, France, Germany, Italy, Netherlands and Spain.

6. Chart B.14 Despite recent improvement, perceptions of secured market functioning remain poor
Respondents’ views of overall market functioning(a)
Sources: MMLC Sterling Money Market Survey and Bank calculations.
‘Net percentage balance’ is calculated as the difference between the balance of lenders reporting that, on a scale of 1–5, the market was functioning very poorly (1) to very well (5). The net percentage balances are scaled to lie between ±100: more extreme responses (1 and 5) attract a weight of 100%, less extreme responses (2 and 4) attract a weight of 50% and central responses (3) attract a weight of zero.

7. Chart B.15 Total assets of open-ended funds worldwide have almost doubled since 2008
Growth in open-ended fund assets worldwide and flows(a)
Sources: EFAMA, ICI and Bank calculations.
Adjusted for a break in the series due to expanded coverage in 2014 Q4 on best endeavour basis. Including MMFs but excluding funds of funds where possible. In 2008 Q4, bond and equity funds accounted for half of all open-ended funds; in 2016 Q2 it was two thirds.

8. Chart B.16 Open-ended bond funds hold a larger proportion of the corporate bonds in issuance than in 2008
Open-ended investment bond funds’ holdings of corporate bonds(a)
Sources: Bank of England, Dealogic, ECB, Federal Reserve, Morningstar and Bank calculations.
United Kingdom: sterling corporate bond funds (open-ended and ETFs) total net assets as a share of all outstanding sterling corporate bonds. United States: mutual funds’ holdings of corporate and foreign bonds as a share of all outstanding corporate and foreign bonds. Euro-area: euro-area open-ended holdings of bonds issued by euro-area non-financial corporations as a share of total. UK data until October 2016; US and euro-area data until 2016 Q2.

9. Chart B.17 The price of equity issued by UK insurers has increased after sharp falls following the United Kingdom’s EU referendum
Equity price index for selected UK insurers(a) and the FTSE All-Share
Sources: Thomson Reuters Datastream and Bank calculations.
(a) Arithmetic mean of indexed share prices of selected UK insurance groups (Aviva, Legal and General, Prudential and Standard Life).

10. Box 3: Issues around the sterling flash event

11. Chart A Recent episodes of heightened short-term volatility(a)(b)
Sources: Bloomberg and Bank calculations.
Sterling flash event 7 October 2016 (blue), US equity markets flash-crash 6 May 2010 (magenta), US Treasury market flash-rally 15 October 2014 (orange) and removal of the Swiss franc peg to the euro 15 January 2015 (green).
Data shown in two minutes intervals, and may not fully capture the lowest traded prices during each event.

12. Chart B Prices and order book depth on Reuters Matching foreign exchange platform on 7 October
Sources: Sources: Thomson Reuters and Bank calculations.
Series shows the mid-point between the best bid and best offer price in the Reuters Matching electronic order book. Data shown for each point in time at which there is an addition or revision to the order book.
Series shows the sum of the ten best available bids to buy sterling in the Reuters Matching electronic order book. Data shown for each point in time at which there is an addition or revision to the order book.
Grey area shows the time during which trading halts or restrictions were intermittently in effect on sterling/US dollar futures contracts traded on the CME.

13. Chart C Sterling/US dollar intraday trading volumes(a)(b)
Sources: Sources: Thomson Reuters and Bank calculations.
Trading volumes per minute on Reuters Matching foreign exchange platform, averaged over ten-minute intervals.
Index: 100 = average trading volume per minute, across all ten-minute intervals, over 3–6 October.

14. Financial stability risk and regulation beyond the core banking sector

15. Chart A Network of counterparties in cleared and uncleared sterling forward rate agreements(a)(b)
Sources: DTCC & UnaVista Trade Repository data and Bank calculations.
As of 30 June 2016.
The size of each node is proportional to the outstanding gross notional of a given market participant against all of its counterparties, and the thickness of the connecting lines is proportional to the total amount of gross notional between two nodes.
Includes institutions which are neither the primary CCP nor dealers/banks, such as pension funds, insurers and other funds.

16. Chart B Assets under management of exchange-traded funds by domicile
Source: Deutsche Bank ETF Research.

17. Chart C Gross new annual UK P2P lending
Sources: Bank of England, Nesta, University of California – Berkeley, University of Cambridge and Bank calculations.
‘Other major lending flows’ is a sum of consumer and business lending. Consumer lending is consumer credit gross lending from MFIs and other lenders (excluding student loans and credit cards). Business lending is UK MFIs’ gross lending (excluding overdrafts) to non-financial SMEs. Business lending data are available from April The 2011 data point scales up available monthly flows data for that year.

18. Risks to financial stability from insurers’ investment behaviour

19. Chart A UK financial sector assets excluding derivatives(a)(b)(c)(d)
Source: Burrows, O, Cumming, F and Low, K (2015), ‘Mapping the UK financial system’, Bank of England Quarterly Bulletin, Vol. 55, No. 2, pages 114–29;
See ‘Mapping the UK financial system’, Figure 3, ibid, for full definitions of each sector.
UK-owned banks are measured on a global consolidated basis. UK-resident branches and subsidiaries of foreign-owned banks are measured on a residency basis, with cross-border assets excluded for foreign-owned branches.
Insurance companies and pension funds are measured on a residency basis. Insurance companies include all PRA-authorised insurers and reinsurance companies. Pension funds covers self-administered pension funds in the United Kingdom.
In general, other non-banks are included if managed in the United Kingdom. The range of sources used to estimate non-banks may not report on consistent bases.

20. Table 1 Estimated UK life insurers’ asset holdings for selected asset classes(a)(b)(c)
Sources: Bank of America Merrill Lynch, DMO, PRA regulatory data, Thomson Reuters Datastream, and Bank calculations.
Life insurers include life and composite insurers.
Equity holdings include investments in equity funds. Government bond and corporate bond holdings include investments in debt funds.
Data as at end-Q

21. Chart B Range of past transfer margins of UK life insurers’ liabilities compared to ten-year UK government bond yields
Sources: PRA regulatory data, Thomson Reuters Datastream and Bank calculations.

22. Chart C Insurers’ estimated investment responses to selected financial market shocks(a)(b)
Sources: PRA regulatory data and Bank calculations.
‘Low-risk assets’ mainly include cash, government bonds and corporate bonds with a credit rating of A or above, but also include a subset of investment funds and other assets; we define ‘risky assets’ as insurers’ residual asset holdings.
‘With TMTPs’ reflects where Solvency II has been in place for one year, such that the impact of TMTPs is reduced by 1/!^. ‘Without TMTPs’ reflects where Solvency II has been in place for 16 years, such that the impact of TMTPs is reduced entirely.