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    BoE Examines Financial Stability; PRA to Conduct Cyber Stress Test

    December 13, 2021

    The Bank of England (BoE) published a report that sets out the assessment of the Financial Policy Committee (FPC) on stability of the financial system in UK. FPC also announced its decision to increase the UK countercyclical capital buffer (CCyB) rate to 1%, with the increased rate to be implemented by December 13, 2022. Provided the economy continues to recover, FPC expects to increase the CCyB to 2% in the second quarter of 2022, with the expectation that this increase will take effect in the second quarter of 2023. Along with the report, BoE published a summary and record of the FPC meeting held in December 2021 and the final results of the 2021 solvency stress test of the UK banking system. In another development, the Prudential Regulation Authority (PRA) announced that it will invite a number of firms to participate in a voluntary cyber stress test.

    The financial stability report reveals that the capital and liquidity positions of banks remain strong and they have sufficient resources to continue to support lending to the economy. The UK banking system remains resilient to outcomes for the economy that are much more severe than the central forecast of the Monetary Policy Committee. This judgment is supported by the final results of the 2021 solvency stress test. FPC has tested the resilience of the UK banking system against a much more severe evolution of the pandemic and the consequent economic shock. Consistent with the nature of the solvency stress test exercise, FPC and the Prudential Regulation Committee will not use the test as a direct input for setting capital buffers for UK banks. For 2022, BoE intends to revert to the annual cyclical scenario stress-testing framework and will publish further details on this in the first quarter of 2022. The report also notes that FPC remains vigilant to debt vulnerabilities in the economy that could amplify risks to financial stability. FPC judges that domestic debt vulnerabilities have not increased materially over the course of the pandemic. However, UK corporate debt vulnerabilities have increased relatively moderately over the pandemic so far.

    FPC also reviewed its two mortgage market measures: one measure limits the share of new mortgages that can be issued at high loan-to-income ratios while the second requires lenders to assess whether borrowers could continue to afford their mortgage if their mortgage interest rate increased to 3 percentage points above their Standard Variable Rate. The Financial Conduct Authority (FCA) also has rules on affordability testing. The FPC review found that the measure on lending at high loan-to-incomes was more effective at reducing risk in a housing boom, while also having less impact on borrowers in normal times. FPC judges that loan-to-income limits, without its affordability test but alongside the FCA rules on affordability testing, ought to deliver an appropriate level of resilience to the UK financial system, but in a simpler, more predictable, and more proportionate way. Therefore, FPC intends to consult on withdrawing its affordability measure in the first quarter of 2022. The report also notes that cryptoassets pose limited direct risks to the financial stability in UK. FPC will continue to pay close attention to the developments in this area and will seek to ensure that the UK financial system is resilient to systemic risks that may arise from cryptoassets. 

    In a separate statement, PRA announced that it will invite a number of firms to participate in a voluntary cyber stress test. The stress test, which was announced in March 2021, will focus on a severe data integrity incident as the disruption scenario and will test the ability of firms to meet the impact tolerance for payments in a severe but plausible scenario. Impact tolerance is broadly defined as the maximum level of disruption that could be tolerated for a service provided by the finance system. The Prudential Regulation Committee in addition agreed to invite a limited number of firms with a smaller presence in the retail payment system to take part in this cyber stress test. The objective of expanding coverage of the cyber test, suitably adjusted for scale, is to provide valuable insight about the role and preparedness of smaller banks as a sector and about any systemic implications that may arise. PRA will contact the selected firms with more information about the test in due course.

     

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    Keywords: Europe, UK, Banking, Regulatory Capital, CCyB, Stress Testing, Credit Risk, Systemic Risk, Mortgage Lending, Lending, Cyber Risk, Financial Stability, Basel, Macro-Prudential Policy, PRA, FCA, BoE

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