On 16 December 2019, the Bank of England Financial Policy Committee published its Financial Stability Report.
The Report details the Financial Policy Committee outlook for UK Financial Stability, including the resilience of the UK Financial System, main risks to Financial Stability, and Actions taken by the Bank of England.
The Report includes results from the 2019 Annual Cyclical Scenario Stress Test (‘ACS’):
- The UK Banking System is considered resilient to potential crises more severe than the 2007/8 Global Financial Crisis; Banks would be able to meet Consumer Credit Demand even in ‘Highly Adverse Conditions’
- Major UK banks’ Capital Ratios have remained stable; Tier 1 Capital Ratios are over three times higher than at the beginning of the 2007/8 Global Financial Crisis
- It is considered that the UK Banking System is resilient to a range of scenarios, including a worst-case disorderly Brexit, broadening of the US-China Trade Conflict, and escalation of the Hong Kong crisis.
The Report also addresses other concerns:
- Systemic Risk may arise from Open-Ended Investment Funds due to frequent mismatches between Redemption Terms and Liquidity of underlying Assets
- Firms remain reliant on the London Inter-Bank Offered Rate (‘LIBOR’) despite its discontinuation by 2021
- The payments landscape requires an updated Regulatory Framework to ensure that rapidly evolving Payment Systems support Financial Stability
- Financial Market Participants must be aware that Liquid Markets can rapidly become Illiquid (e.g. Recent Liquidity shocks in US Repo Markets)
Firms should review the Financial Stability Report to develop an awareness of relevant Systemic Risks and, where appropriate, consider potential mitigation strategies, driven by Senior Management / Executive Teams, Boards of Directors and Audit and Risk Committees.
Banks regulated by the Prudential Regulation Authority should be aware of Prudential Decisions summarised in the Report – Financial Institutions should appraise Senior Management, Compliance, and Finance functions to ensure readiness for Prudential Regulatory Changes. Such decisions include:
- Counter-cyclical Capital Buffer (‘CCyB’) to be increased from 1% to 2%
- Existing limits on Mortgage Lending to be maintained (e.g. maximum limit of 15% on proportion of new mortgages that exceed 4.5x borrowers’ income)
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Please Note: This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying the information contained in this publication to specific issues or transactions.
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