The Financial Policy Committee (FPC) has published its Financial Stability Report for 2015 covering:
- the FPC’s view of the current stability of the UK financial system;
- an assessment of the strengths and weaknesses of the UK financial system and the risks to stability; and
- the FPC’s view on the outlook for the stability of the UK financial system.
In the report the FPC identifies certain factors as the main risks facing the UK financial system. These include the global environment, the reduction in market liquidity in some markets, the UK’s current account deficit, the UK housing market, the consequences of misconduct in the financial system and cyber-attacks.
The report also sets out three FPC recommendations that were made at its meeting on 24 June 2015:
- direction on the leverage ratio. The FPC directs the PRA to implement in relation to each major UK bank and building society on a consolidated basis measures to:
- require it to hold sufficient Tier 1 capital to satisfy a minimum leverage ratio of 3%;
- secure that it ordinarily holds sufficient Tier 1 capital to satisfy a countercyclical leverage ratio buffer rate of 35% of its institution-specific countercyclical capital buffer rate, with the countercyclical leverage ratio buffer rate percentage rounded to the nearest 10 basis points; and
- secure that if it is a global systemically important institution (G-SII) it ordinarily holds sufficient Tier 1 capital to satisfy a G-SII additional leverage ratio buffer rate of 35% of its G-SII buffer rate.
- the FPC has also specified the minimum proportions of common equity tier 1 (CET 1) capital that should be held in respect of each requirement;
- role of AT1 in minimum leverage ratio requirements. The FPC recommends to the PRA that in implementing the minimum leverage ratio requirement it specifies that additional Tier 1 capital should only count towards Tier 1 capital for these purposes if the relevant capital instruments specify a trigger event that occurs when the common equity Tier 1 capital ratio of the institution falls below a figure of not less than 7%; and
- CBEST vulnerability testing. The FPC recommends that the Bank of England (BoE), the PRA and the FCA work with firms at the core of the UK financial system to ensure that they complete CBEST tests and adopt individual cyber resilience action plans. The BoE, the PRA and the FCA should also establish arrangements for CBEST tests to become one component of regular cyber resilience assessment within the UK financial system.
View Financial Stability Report, 1 July 2015