September 25, 2017

At the BoE's Financial Policy Committee (FPC) meeting, which was held on September 20, 2017, the key developments included review of developments since its June 21 meeting, particularly assessment of the outlook of financial stability risks, FPC's recommendation to the PRA to set the minimum leverage requirement at 3.25%, and discussion on the implementation of International Financial Reporting Standard (IFRS) 9 on January 01, 2018. It was decided that FPC will take steps to ensure that the interaction of IFRS 9 accounting with its annual stress test does not result in a de facto increase in capital requirements. The United Kingdom has supported EU authorities’ proposals that transitional arrangements should be used to smooth the impact of introducing IFRS 9. Final arrangements are expected to be decided later this year.

FPC confirmed its recommendation to the PRA to set the minimum leverage requirement at 3.25%, with central bank reserves removed from the leverage exposure measure. The PRA will shortly be publishing its rules on how this change will be implemented. FPC also continued to review the risks of disruption to financial services arising from Brexit, with the aim to take action to mitigate these risks. FPC is considering risks arising from discontinuity of cross-border contracts, particularly insurance and derivatives; restrictions on sharing of personal data between the EU and the UK; and restrictions after Brexit on cross-border banking, central clearing, and asset management service provision. Where it would be complex and difficult for firms to mitigate the risks fully, such as the continuity of contracts between the UK and the EU27 counterparties, FPC is exploring other mitigating actions. A fully effective mitigant to these risks will require some form of bilateral agreement between the EU and the UK.

 

Another highlight was the discussion on the continued resilience of the major banks in the UK. The aggregate common equity tier 1 capital ratio of major banks has increased to 14.3% of risk-weighted assets and they now have a capital ratio that is more than three times higher than it was ten years ago. The summary of the meeting highlights that FPC’s judgment of the necessary level of loss-absorbing capacity for the banking system is invariant to accounting standards. The change in accounting standard will not, by itself, change the cumulative losses banks incur during any given stress episode. FPC's judgment of the appropriate level of capital for the banking system was calibrated such that banks could absorb the cumulative losses in historical stress episodes and continue to provide essential services to the real economy, regardless of the timing of when those losses were actually measured.

 

Related Link: Press Release and FPC Statement (PDF)

Keywords: Europe, UK, Banking, Insurance, Financial Stability, Brexit, IFRS 9, Leverage Ratio, FPC, BoE

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