BoE published the financial stability report, which sets out the view of the Financial Policy Committee (FPC) on stability of the financial system in UK. It covers the assessment, by FPC, of the resilience of financial system and the main risks to the financial stability, along with the actions being taken to mitigate the identified risks. It also reports on the activities of FPC over the reporting period and on the extent to which the previous policy actions of FPC have succeeded in meeting its objectives. BoE also published the record of the FPC meetings held on June 13, 2019 and July 04, 2019. The next policy meeting of FPC will be on October 02, 2019.
The report highlights that the core of UK financial system, including banks, dealers, and insurance companies, is resilient to, and prepared for, the wide range of risks it could face, including a worst-case disorderly Brexit. FPC is maintaining the UK countercyclical capital buffer (CCyB) rate at 1%. The report specifies that most financial stability risks stemming from disruption to cross-border financial services in a no-deal Brexit have been mitigated. However, in the absence of further action by EU authorities, some disruption to cross-border financial services is possible. Although such disruption would primarily affect EU households and businesses, it could amplify volatility and spill back to the UK in ways that cannot be fully anticipated or mitigated.
BoE will, in 2019, conduct a biennial exploratory exercise to explore the implications of a severe and broad-based liquidity stress affecting major UK banks simultaneously. Banks hold regulatory liquidity buffers that FPC expects to be used in a stress. The exercise will explore how the reactions of banks and authorities to the stress would shape its impact on the broader financial system and the UK economy. BoE intends to publish the results of the exploratory exercise in mid-2020. The report notes that in the 2021 biennial exploratory scenario, BoE will stress test resilience of the financial system to the physical and transition risks of climate change. It will gather views on the design of the exercise and, as a first step, will publish a discussion paper in Autumn 2019. This exercise will integrate climate scenarios with macroeconomic and financial system models. This will also motivate firms to address data gaps and to develop cutting-edge risk management consistent with a range of possible climate pathways—ranging from early and orderly to late and disruptive. The discussion paper will cover issues such as the coverage of the test, the nature of scenarios considered, and the appropriate time horizon and disclosure of results.
The report mentions that continued reliance of global financial markets on LIBOR poses risks to financial stability that can be reduced only through a transition to alternative benchmark rates by the end of 2021. The pace of market participants’ transition efforts now needs to accelerate and FPC will monitor the progress closely. The smoothest transition will be one in which market participants cease new issuance of LIBOR-linked contracts; identify all existing contracts without appropriate fallback clauses and rectify this to the greatest extent possible; and actively reduce legacy exposures by negotiating their transition to new rates. It is not in firms’ own interests to have a large stock of legacy contracts that will become subject to significant legal uncertainty beyond 2021. There are advantages to re-negotiating contracts to refer to alternative reference rates well in advance of the end of 2021. Well-managed firms are expected to lead the transition. All firms that responded to the PRA’s and FCA’s Dear CEO letter have now appointed a Senior Manager accountable for overseeing the transition.
Keywords: Europe, UK, Banking, Insurance, Securities, Financial Stability Board, Brexit, CCyB, LIBOR, Stress Testing, Systemic Risk, Climate Change Risks, FPC, BoE
Previous ArticleBoE Publishes Results of Systemic Risk Survey for First Half of 2019
EBA published a report analyzing the impact of the unwind mechanism of the liquidity coverage ratio (LCR) for a sample of European banks over a three-year period, from the end of 2016 to the first quarter of 2020.
In response to questions from a member of the European Parliament, the ECB President Christine Lagarde issued a letter clarifying the possibility of amending the AnaCredit Regulation and making targeted longer-term refinancing operations (TLTROs) dependent on the climate-related impact of bank loans.
IASB started the post-implementation review of the classification and measurement requirements in IFRS 9 on financial instruments and added the review as a project to its work plan.
FSB published a report that examines progress in implementing policy measures to enhance the resolvability of systemically important financial institutions.
EBA published a report on the benchmarking of national loan enforcement frameworks across 27 EU member states, in response to the call for advice from EC.
FSB published a letter from its Chair Randal K. Quarles, along with two reports exploring various aspects of the market turmoil resulting from the COVID-19 event.
RBNZ launched a consultation on the details for implementing the final Capital Review decisions announced in December 2019.
The Trustees of the IFRS Foundation, which are responsible for the governance and oversight of IASB, have announced the appointment of Dr. Andreas Barckow as the IASB Chair, effective July 2021.
HKMA issued a letter to consult the banking industry on a full set of proposed draft amendments to the Banking (Capital) Rules for implementing the Basel standard on capital requirements for banks’ equity investments in funds in Hong Kong.
ESRB published an opinion assessing the decision of Swedish Financial Supervisory Authority (FSA) to extend the application period of a stricter measure for residential mortgage lending, in accordance with Article 458 of the Capital Requirements Regulation (CRR).