The Financial Policy Committee (FPC) has published a Financial Stability Report (the Report) which sets out the FPC’s view of the outlook for UK financial stability, including its assessment of the resilience of the UK financial system and the current main risks to financial stability, and the action it is taking to remove or reduce those risks. It also reports on the activities of the FPC over the reporting period and on the extent to which the FPC’s previous policy actions have succeeded in meeting the its objectives.
Among other things, the Report notes:
- the UK banking sector has become more resilient in line with regulatory requirements. The aggregate Tier 1 capital position of major UK banks was 13% of risk-weighted assets in September 2015;
- the stress-test results and banks’ capital plans, taken together, indicate that the banking system would have the capacity to maintain its core functions, notably lending capacity, in a stress scenario such as the one in the 2015 stress test; and
- the FPC is maintaining the UK countercyclical capital buffer rate at 0% at this stage but will carefully review the setting of the countercyclical capital buffer rate in March 2016.
The FPC also published a capital framework supplement to the Report (the Supplement), which finalises its view on the overall calibration of the capital framework (both the going and gone concern elements) for the UK banking system.
The Supplement is structured in the following way:
- Section 1 considers the appropriate level of capital required by the UK banking system, compares it to the current and planned requirements and outlines the transitions from the current framework to the end state in 2019;
- Section 2 concerns the FPC’s strategy for setting the countercyclical capital buffer on UK exposures, which it does every quarter. The FPC is updating its strategy and this section sets out its approach;
- Section 3 outlines how the framework described in the Supplement compares to capital frameworks in place in other jurisdictions; and
- Section 4 summarises the further steps that will be taken to clarify and finalise the capital framework.
With regards to next steps, the Supplement notes that:
- in December, the Bank of England will consult on overall loss absorbency requirements through ‘minimum requirements for own funds and eligible liabilities’;
- in early in 2016, the FPC will consult on its framework for the systemic risk buffer that will be applied to ring-fenced banks and large building societies;
- in the first quarter of 2016, the PRA Board will complete its review of existing supervisory requirements to remove any potential overlap with the FPC’s strategy for using the UK countercyclical capital buffer and supervisory requirements will begin to be adjusted as other buffer requirements begin to be phased in; and
- by the end of 2016, the Basel Committee will address shortcomings in measures of risk-weighted assets. The PRA Board keeps its compensating supervisory requirements under review and will adjust these as appropriate.
View Financial Stability Report, December 2015, 1 December 2015