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June 27, 2018

BoE published the financial stability report, which sets out view of the Financial Policy Committee (FPC) on the stability of the UK financial system and what it is doing to remove or reduce any risks to the system. In the recent months, there has been some reduction in domestic risk appetite, although it remains strong. Moreover, risks from global vulnerabilities remain material and have increased.

The report highlights that the 2017 stress test showed that the UK banking system is resilient to severe domestic, global, and market shocks. FPC is maintaining the UK countercyclical capital buffer (CCyB) rate at 1%. Furthermore, FPC continues to judge that the UK banking system could support the real economy through a disorderly Brexit. The 2017 stress test encompassed a wide range of UK macroeconomic outcomes that could be associated with Brexit. As it has set out previously, FPC judges that Brexit risks do not warrant additional capital buffers for banks. FPC is continuing to monitor preparations to mitigate disruption to financial services that could arise from Brexit. The biggest remaining risks of disruption are where action is needed by both the UK and EU authorities, such as ensuring the continuity of existing derivative contracts. As yet, EU has not indicated a solution analogous to a temporary permissions regime. FPC welcomes the establishment, in April, of a technical working group, chaired by ECB and BoE, on risk management in the area of financial services in the period around March 30, 2019.

FPC is setting standards for how quickly critical financial companies must be able to restore vital services following a cyber attack. It plans to test them against the cyber stress tests.The Bank will test that firms would be able to meet the standards of FPC for recovering services. Additionally, continued reliance of financial markets on Libor poses a risk to financial stability that can be reduced only through a transition to alternative rates. FPC will monitor progress and report regularly. Good progress has been made to establish potential alternatives to Libor. In the UK, the sterling overnight index average (SONIA) is the preferred alternative and two important market‑led consultation exercises are due to be conducted soon. However, as long as the outstanding stock of contracts maturing after 2021 that reference Libor continues to increase, so will the associated medium‑term financial stability risks. Overall, FPC is working to ensure that the UK financial system has the necessary resilience to meet the needs of UK households and businesses in good times and bad, whether risks originate at home or abroad.

 

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Keywords: Europe, UK, Banking, Financial Stability Report, Brexit, Cyber Risk, Stress Testing, FPC, BoE

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