The Bank of England unpacked 65 billion $72 billion in an emergency measure to prevent a crash in bond prices. Without intervention, the U.K. pension funds, which rely heavily on bond holdings, would have entered default.
According to former government officials and market analysts, the British economy is not off the hook, as other non-bank financial institutions pose a risk to the country's stability.
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Gordon Brown, former British Prime Minister, echoed these fears on BBC Radio this week.
Brown said that he did not think the crisis is over because the pension funds were rescued last week. He called for UK regulators to tighten their supervision of shadow banks.
He said that there has to be eternal vigilance about what has happened to the shadow banking sector, and I do fear that there will be more crises to come.
Bond funds, private lenders and companies that are involved in cryptocurrencies are handing out credit with regulations in place. The country's central bank authority risks losing its influence on monetary policy because of this.
In early August, Paul Tucker, former deputy governor for the Bank of England, accused the central bank of having inadequate regulation around the shadow banking sector.
What if a decade passes without a general policy, and then a massive part of shadow banking unravels? Tucker told the Financial Times that he was almost predicting the recent near-crash of the bond market in the hands of pension funds.
The Bank for International Settlements BIS, an international organization composed of most major central banks, called for central banks to tighten their regulation around non-bank financial institutions last year.
Shadow banks cover areas that banks do not, and as such, they are a healthy source of diversity in external financing, said the BIS report.
It stated that they could make the financial system more efficient but also more unstable.
The capital requirements are not set by the government, but by the private institutions they do business with, since shadow banks are not regulated by a central bank.
As interest rates rise and liquidity decreases, other non-bank financial institutions may run into trouble if they don't have new collateral and don't receive payments from their debtors.
According to Giles Coghlan, Chief Market Analyst at HYCM, Britain s shadow banking sector is smaller than the bank's certified banking system and provides a way of borrowing at lower rates, but lending at higher ones.
The sudden rises in interest rates that we have seen of late were going to put the shadow banking business model at risk, especially if the people a lender has lent to are no longer in a position to repay their loans, he told Benzinga.
They're still a relatively small part of the U.K.'s wider financial infrastructure, and the impact of this stress has not been felt to the extent that it might have been if normal banking institutions were facing comparative challenges, he said.
The traditional banking sector has been designed to avoid these nightmare scenarios that could lead to major defaults with no capital buffers. Similar regulations around shadow banks could allow the U.K. government to prevent future economic crashes.