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    BoE Publishes Financial Stability Report and Stress Test Results

    December 16, 2019

    BoE published the financial stability report for 2019, including the results of its 2019 stress test for the banking sector in the UK. The financial stability report sets out view of the Financial Policy Committee (FPC) on the outlook for UK financial stability, including its assessment of the resilience of the UK financial system and the main risks to UK financial stability, along with the action FPC is taking to remove or reduce those risks. It also summarizes the activities of FPC over the reporting period and explains the extent to which the previous policy actions of FPC have succeeded in meeting its objectives. BoE also published record of FPC meeting held in December 2019, along with remarks of the Governor on the financial stability report. Also published were the results of the biannual systemic risk survey for the second half of 2019; the survey quantifies and tracks views of market participants on risks to, and their confidence in, the stability of the UK financial system.

    The financial stability report highlights that the 2019 annual cyclical scenario stress test shows the UK banking system would be resilient to deep simultaneous recessions (in the UK and global economies) that are more severe overall than the global financial crisis, combined with large falls in asset prices and a separate stress of misconduct costs. The major UK banks’ aggregate common equity tier 1 (CET1) capital ratios after the 2019 stress scenario would still be more than twice their level before the crisis. Moreover, the capital rations of major UK banks have remained stable since year-end 2018 (the starting point of the 2019 stress test). At the end of the third quarter of 2019, the CET1 ratios of these banks were over three times higher than at the start of the global financial crisis. Major UK banks also continue to hold sizable liquid asset buffers. Therefore, FPC is raising the level of the UK countercyclical capital buffer (CCyB) rate that it expects to set in a standard risk environment from in the region of 1% to in the region of 2%.

    The 2019 stress-test scenario for the UK economy was severe enough to encompass the range of economic shocks that could be associated with a disorderly Brexit. Even if a protectionist-driven global slowdown were to spill over to the UK at the same time as a worst-case disorderly Brexit, FPC judges that the core UK banking system would be strong enough to absorb, rather than amplify, the resulting economic shocks. Alongside PRA, FPC will now pilot options for an enduring approach for incorporating the new IFRS 9 accounting standard into bank stress tests and capital requirements. The approaches to be piloted are consistent with the principle that the new accounting standard, which is being phased in until 2023, should not result in an unwarranted de facto increase in capital requirements. Annexes 3 and 4 of the report sets out the individual bank results and supervisory stance with respect to those banks. The results are presented for Barclays plc, HSBC Holdings plc, Lloyds Banking Group plc, Nationwide Building Society, The Royal Bank of Scotland plc, Santander UK Group Holdings plc, and Standard Chartered plc. FPC publishes the financial stability report twice a year.

    BoE is also presenting results of the systemic risk survey, which it conducted between September 23 and October 17 this year. The survey is generally completed by executives responsible for risk management and treasury functions at institutions, including UK banks and building societies, large foreign banks, asset managers, hedge funds, insurers, pension funds, large non-financial companies, and central counterparties. The results of the systemic risk survey show that confidence in the stability of the UK financial system over the next three years remains broadly unchanged. Additionally, the perceived probability of a high-impact event occurring over both the short and medium term has increased, with the UK political risk remaining the most challenging for firms to manage and the risk of a cyber-attack being the second most challenging risk for firms to manage.

     

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    Keywords: Europe, UK, Banking, Insurance, Securities, Pensions, Financial Stability Report, Stress Testing, CCyB, IFRS 9, Systemic Risk, FPC, Systemic Risk Survey, Cyber Risk, BoE

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