The Bank of England has published a consultation paper concerning the Financial Policy Committee’s (FPC) systemic risk buffer framework.
The systemic risk buffer (SRB) looks to increase the capacity of UK systemic banks to absorb stress, thereby increasing their resilience relative to the financial system as a whole.
The Financial Services (Banking Reform) Act 2013 provides for structural separation of systemically important banking groups in the UK, through the ring-fencing of vital banking services from risks elsewhere in the financial system. Ring-fenced banks and large building societies will be required to have higher levels of capital.
Under the UK legislation implementing the SRB the FPC is required to establish a framework for an SRB that applies to ring-fenced banks and large building societies that hold more than £25 billion of household and small/medium enterprise (SME) deposits. Such firms would also be subject to an additional leverage ratio buffer rate, calculated at 35% of the SRB rate.
The FPC articulated the overall bank capital framework in the Supplement to the December 2015 Financial Stability Report. The consultation paper now published by the Bank of England sets out the FPC’s proposals for elements of the SRB framework. In particular it sets out:
- the criteria for assessing systemic importance;
- a proxy for measuring and scoring those criteria;
- a threshold at which firms are considered to be systemically important for this purpose; and
- the calibration of the SRB for those firms exceeding the threshold.
Chapter 5 of the consultation paper sets out the FPC’s proposed calibration of the SRB. The FPC proposes to calibrate SRB rates in a way that reflects SRB institutions’ systemic importance, meaning that firms with higher levels of total assets – and therefore greater potential to damage the UK economy – would be subject to higher buffers and therefore greater levels of resilience. SRB institutions that are below the threshold where the FPC considers firms to be systemically important (£175 billion total assets), but above the £25 billion retail and SME deposits threshold required to be designated an SRB institution, are expected to be subject to a 0% SRB rate.
Chapter 7 notes that the SRB (including through its impact on the additional leverage ratio buffer) is expected to add around 0.5% of risk weighted assets to equity requirements of the system in aggregate. This forms part of the FPC’s view – as set out in the Financial Stability Report – that non-time varying Tier 1 components of the overall capital framework should sum to around 11% of risk-weighted assets for the system as a whole.
The deadline for comments on the consultation paper is 22 April 2016. The FPC intends to finalise the framework by 31 May 2016. The buffer, like ring-fencing itself, will be introduced and applied by the PRA in 2019.
View FPC consults on systemic risk buffer framework, 29 January 2016