IMF Issues Reports on 2017 Article IV Consultation with United Kingdom
IMF issued staff report and selected issues report in the context of the 2017 Article IV consultation with the United Kingdom (UK). Directors welcomed the recent progress in negotiating the departure of the UK from EU, which allowed discussion to move to issues related to a transition period and the framework for the future relationship. Directors commended the authorities for proactively helping financial institutions to prepare for the exit, given the uncertainties about the future of financial service arrangements with the EU. They called on all involved parties to work together to mitigate transition risks related to changes in regulatory regimes and responsibilities.
The staff report highlights that the major UK banks are well-capitalized and satisfy the Basel III liquidity coverage ratio and net stable funding ratio requirements. However, strong regulatory capital ratios benefited from declining risk-weights on mortgages and consumer loans, partly reflecting benign cyclical conditions and declining nonperforming loans. The 2017 annual stress test of BoE suggests that the UK banking system is resilient to deep simultaneous recessions in the UK and global economies, large falls in asset prices, and a separate stress of misconduct costs. Moreover, strengthening of the bank resolution framework is on track: large core retail banking operations will be ring fenced by 2019 while banks are raising their total loss-absorbing capacity and satisfying resolution planning requirements. Adopting the Basel III final agreement in due time would help reduce excess variability in risk-weights across banks using internal models.
The staff report notes that the Executive Directors encouraged the authorities to maintain robust prudential and supervisory standards and to continue monitoring consumer credit and bank risk-weights. The countercyclical capital buffer (CCyB) was lowered to prevent a tightening of credit conditions. BoE increased the CCyB to 1% in November 2017, reflecting its assessment that—excluding the impact of Brexit—the risk environment is close to a standard level. Any relaxation of the CCyB would need to maintain confidence in the financial system and ensure an appropriate degree of resilience against future shocks.CCyB rate should be kept under review to ensure it continues to evolve in line with the overall risk level. The authorities should consider conducting a system-wide liquidity stress test of the major UK banks in a future biennial exploratory scenario. Stable liquidity conditions are important for the smooth functioning of capital markets. Following the recommendations of the 2016 FSAP, BoE is developing a financial-system-wide simulation to model the dynamic interaction of insurers, funds, and dealers under stress.
The staff report also emphasizes the major Brexit-related challenges to the UK financial sector. The 2017 annual cyclical stress test of BoE suggests that the major UK banks are sufficiently well-capitalized to withstand a disorderly Brexit. However, even an orderly Brexit could pose significant business continuity challenges. Financial institutions have been asked to develop comprehensive contingency plans in consultation with BoE. Based on a review of these plans, the authorities have identified two key issues that would be difficult for financial firms to address unilaterally and could best be handled through bilateral agreements between the UK and EU. These include the continuity of outstanding cross-border over-the-counter derivative and insurance contracts and the continued cross-border sharing of personal data within institutions. Regulation and oversight arrangements for euro denominated derivatives clearing on UK-based central counterparties will require careful design. The report states that a broad agreement on the new economic relationship with the EU must be achieved by March 2019. The selected issues report examines the key factors behind the slowdown of the wage growth and the regional disparities in labor productivity in the United Kingdom.
Related Links
Keywords: Europe, UK, Banking, Insurance, Securities, Basel III, CCyB, CCP, FSAP, Article IV, IMF
Featured Experts

María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer

Pierre-Etienne Chabanel
Brings expertise in technology and software solutions around banking regulation, whether deployed on-premises or in the cloud.

Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Previous Article
ECB Consults on the First Part of Guide to Internal Models for BanksRelated Articles
EC Adopts Financial Reporting Changes Arising from Benchmark Reforms
EC published Regulation 2021/25 that addresses amendments related to the financial reporting consequences of replacement of the existing interest rate benchmarks with alternative reference rates.
BIS Bulletin Examines Key Elements of Policy Response to Cyber Risk
BIS published a bulletin, or a note, that examines the cyber threat landscape in the context of the pandemic and discusses policies to reduce risks to financial stability.
HMT Updates List of Post-Brexit Equivalence Decisions in UK
HM Treasury, also known as HMT, has updated the table containing the list of the equivalence decisions that came into effect in UK at the end of the transition period of its withdrawal from EU.
EBA Issues Erratum for Technical Package on Reporting Framework 3.0
EBA published an erratum for technical package on phase 1 of the reporting framework 3.0.
APRA Publishes FAQ on Measurement of Credit Risk Weighted Assets
APRA updated a frequently asked question (FAQ), for authorized deposit-taking institutions, on the measurement of credit risk weighted assets.
EBA Publishes Risk Dashboard for Third Quarter of 2020
EBA published the quarterly risk dashboard, along with the results of the Risk Assessment Questionnaire survey among 60 banks and 15 market analysts.
ECB Analysis Shows Privacy as Biggest Concern in Use of Digital Euro
ECB concluded the public consultation on the introduction of a digital euro in EU.
ECB Finalizes Guide on Supervisory Approach to Bank Consolidation
ECB published a guide that sets out the supervisory approach to consolidation in the banking sector.
SRB Chair Outlines Work Priorities for 2021
The SRB Chair Elke König published an article setting out work priorities for 2021.
FDIC Selects Companies to Compete in Final Phase of Tech Sprint
FDIC has selected 11 technology companies—including BearingPoint, Fed Reporter, Inc, and S&P Global Market Intelligence, LLC—for inclusion in the third and final phase of the rapid prototyping competition.