The Bank of England (BoE) published the financial stability report, which sets out views of the Financial Policy Committee (FPC) on stability of the financial system and details interim results of the 2021 solvency stress tests on banks. The results indicate that the banking sector remains well-capitalized and resilient. The full and final results of the 2021 solvency stress test, including bank-specific outcomes, will be published in the fourth quarter of 2021. Along with the financial stability report, BoE published a summary and record of the July 2021 meeting of FPC, which aims to identify risks to financial stability and agree on policy actions aimed at safeguarding the resilience of the UK financial system. The Prudential Regulation Authority (PRA) also announced that the extraordinary guardrails within which it asked bank boards to determine the appropriate level of distributions in relation to the full-year 2020 results are no longer necessary and have been removed with immediate effect.
FPC supports the decision that extraordinary guardrails on shareholder distributions are no longer necessary, consistent with the return to the standard approach of PRA to capital-setting and shareholder distributions through 2021. Furthermore, FPC expects to maintain the UK countercyclical capital buffer rate at 0% until at least December 2021. Due to the usual twelve-month implementation lag, any subsequent increase would therefore not be expected to take effect until the end of 2022 at the earliest. At the meeting, FPC identified key focus areas to reduce the likelihood and impact of disruptions to market‐based finance; these focus areas include reducing the demand from the non‐bank financial system for liquidity in stress, ensuring the resilience of the supply of liquidity in stress, and potential additional central bank liquidity backstops for market functioning. FPC also supports the international work to assess whether there was more procyclicality in margin calls than was warranted, whether market participants were prepared for margin calls in a stress, and any consequent need for policy in light of this, without compromising the benefits of the post‐global financial crisis margining reforms. For central banks to deal effectively with financial instability caused by market dysfunction, FPC supports examining whether any new tools are needed; the tools would need to be both effective and minimize any incentives for excessive risk‐taking in the future through appropriate pricing and accompanying regulatory requirements.
In another development, BoE and the Financial Conduct Authority (FCA) concluded their joint review into risks in open‐ended funds and have developed a possible framework for liquidity classification and swing pricing. FPC recognizes that further work is needed to consider how these principles could be applied, and a number of operational challenges will need to be addressed before any final policy is designed and implemented. FPC emphasizes that market participants should use the most robust alternative benchmarks available in transitioning away from use of LIBOR to minimize future risks to financial stability. FPC believes that the recently created credit-sensitive rates—such as those being used in some USD markets—are not robust or suitable for widespread use as a benchmark and considers these rates to have the potential to reintroduce many of the financial stability risks associated with LIBOR. With respect to addressing risks associated wit cloud services, FPC is of the view that additional policy measures to mitigate financial stability risks in this area are needed and welcomes the engagement among BoE, FCA, and Her Majesty's Treasury on how to tackle these risks. FPC has already highlighted that the market for cloud services is highly concentrated among a few cloud service providers, which could pose risks to financial stability.
- Financial Stability Report
- Record of FPC Meeting
- PRA Statement on Shareholder Distributions
- BoE and FCA Review of Open‐Ended Investment Funds
Keywords: Europe, UK, Banking, Securities, COVID-19, Dividend Distribution, Stress Testing, CCyB, Regulatory Capital, Credit Risk, Liquidity Risk, LIBOR, Interest Rate Benchmarks, Cloud Service Providers, Cloud Computing, Financial Stability, Benchmark Reform, Basel, PRA, FPC, FCA
Previous ArticleOCC Seeks to Renew Information Collection on Stress Testing Guidance
The Prudential Regulation Authority (PRA) published the final policy statement PS21/21 on the leverage ratio framework in the UK. PS21/21, which sets out the final policy of both the Financial Policy Committee (FPC) and PRA
The Consumer Financial Protection Bureau (CFPB) proposed to amend Regulation B to implement changes to the Equal Credit Opportunity Act (ECOA) under Section 1071 of the Dodd-Frank Act.
The Prudential Regulation Authority (PRA) decided to maintain, at the 2019 levels, the buffer rates for the Other Systemically Important Institutions (O-SII) for another year, with no new rates to be set until December 2023.
The Financial Stability Board (FSB) published a progress report on implementation of its high-level recommendations for the regulation, supervision, and oversight of global stablecoin arrangements.
In a letter to the authorized deposit taking institutions, the Australian Prudential Regulation Authority (APRA) announced an increase in the minimum interest rate buffer it expects banks to use when assessing the serviceability of home loan applications.
The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) are consulting on the preliminary guidance that clarifies that stablecoin arrangements should observe international standards for payment, clearing, and settlement systems.
The European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA) have set out their respective work priorities for 2022.
The Malta Financial Services Authority (MFSA) updated the guidelines on supervisory reporting requirements under the reporting framework 3.0, in addition to the reporting module on leverage under the common reporting (COREP) framework.
The European Commission (EC) published the Implementing Decision 2021/1753 on the equivalence of supervisory and regulatory requirements of certain third countries and territories for the purposes of the treatment of exposures, in accordance with the Capital Requirements Regulation or CRR (575/2013).
EC published the Implementing Regulation 2021/1751, which lays down implementing technical standards on uniform formats and templates for notification of determination of the impracticability of including contractual recognition of write-down and conversion powers.