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November 28, 2017

The Financial Policy Committee (FPC) of BoE published the financial stability report for 2017, in addition to the results of its 2017 stress test for the banking sector in the UK. The report highlights that the 2017 stress test shows the resilience of the UK banking system to deep simultaneous recessions in the UK and global economies, large falls in asset prices, and a separate stress of misconduct costs. The report also highlights that FPC is raising the UK countercyclical capital buffer (CCyB) rate from 0.5% to 1.0%, with binding effect from November 28, 2018.

The setting of the countercyclical and PRA buffers, as informed by the stress test, will not require banks to strengthen their capital positions. It will require them to incorporate some of the capital they have in excess of their regulatory requirements into their regulatory capital buffers. However, the combination of a disorderly Brexit and a severe global recession and stressed misconduct costs could result in more severe conditions than in the stress test. In such circumstances, capital buffers would be drawn down substantially more than in the stress test and, as a result, banks would be more likely to restrict lending to the real economy. FPC will reconsider the adequacy of a 1% UK CCyB rate during the first half of 2018, in light of the evolution of the overall risk environment. FPC will also continue to assess the risks of disruption to UK financial services arising from Brexit so that preparations can be made and action taken to mitigate them.

FPC publishes the financial stability report twice a year. The report covers assessment of FPC on the outlook for the stability and resilience of the financial sector in the UK, along with the policy actions FPC advises to reduce and mitigate risks to stability. It also summarizes the activities of FPC over the reporting period and explains the extent to which FPC’s previous policy actions have succeeded in meeting its objectives.

 

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Keywords: Europe, UK, Banking, Financial Stability Report, Stress Testing, CCyB, Brexit, BoE

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