Featured Product

    BoE Publishes Financial Stability Report in August 2020

    August 06, 2020

    BoE published the financial stability report, which sets out views of the Financial Policy Committee (FPC) on stability of the financial system in UK. The report highlights that the UK banking system has so far been able to meet most of the initial surge in demand for credit due to COVID-19 pandemic, primarily through government-backed schemes. This reflects the resilience that has been built up since the global financial crisis as well as the extraordinary policy responses of the government and BoE. Critical financial infrastructure, on which the economy relies, has also been resilient. However, underlying vulnerabilities remain and disruption could resurface in the face of certain triggers. There could also be an amplified tightening of credit conditions in the event of a large wave of downgrades of corporate bonds or leveraged loans. Banks will incur losses if businesses struggle to weather disruptions related to the outbreak of COVID-19.

    Overall, the financial stability report identifies key risks to the financial stability in UK and describes actions being taken to mitigate the identified risks. The report also presents the activities of FPC over the reporting period and the extent to which the previous policy actions of FPC have succeeded in meeting the objectives. In the financial stability report, FPC highlights that banks have buffers of capital more than sufficient to absorb the losses that are likely to arise under the central projection of the Monetary Policy Committee. Also taking into account the lending guarantee schemes of the government, banks have the capacity to continue providing credit to support the UK economy. FPC also highlights that the banking system cannot be resilient to all possible outcomes―there are inevitably very severe economic outcomes that would challenge the ability of banks to lend. However, FPC recognizes that, having entered a period of stress, there are costs to banks taking defensive actions, such as cutting lending to seek to boost their resilience. By restricting lending, those actions could make the central outlook materially worse.

    FPC, therefore, takes an explicitly countercyclical approach to stress testing banks, building up their resilience outside stress periods so that their buffers of capital can then be used in a stress to continue to lend. Based on its "reverse stress test" exercise, FPC judges banks to be resilient to a very wide range of possible outcomes. It would, therefore, be costly for them and for the wider economy to take defensive actions. It remains the judgement of FPC that banks have the capacity, and that it is in the collective interest of the banking system, to continue to support businesses and households through this period. FPC will continue to monitor the risks to the economic outlook against the results of the "reverse stress test" and keep its judgement under review. FPC welcomes the work by FSB to undertake a comprehensive review of the provision of market-based finance in light of the COVID-19 shock.

    The report further highlights that most risks to the UK financial stability that could arise from disruption to cross-border financial services have been mitigated, even if the current transition period ends without the UK and EU agreeing specific arrangements for financial services. Thus far, the COVID-19 pandemic has not materially delayed preparations in the financial sector overall. Further action is needed to minimize risks of disruption to the derivatives markets. Disruption to cleared derivatives markets can be avoided by ensuring clarity on the recognition of UK central counterparties by the end of September. The report also states that it is essential to end reliance on LIBOR benchmarks before the end of 2021. After that point, LIBOR benchmarks could cease to be available at short notice. Authorities and industry working groups have revised plans that seek to ensure that the transition from LIBOR is delivered by then. FPC welcomes the forthcoming publication of a protocol for legacy LIBOR-linked derivatives contracts by ISDA. Firms should seek to incorporate appropriate fallback language into their legacy derivatives contracts. The report also mentions that new ways of making payments that become critical to the functioning of the economy will need to be regulated to clear standards.

    The financial stability report also includes a technical annex that describes the data and assumptions used to produce the analysis in the report of how the COVID-19 shock might affect UK corporate finances this year. Along with the report, BoE has published a summary and record of the FPC meetings held on July 29, 2020 and August 03, 2020. The next policy meeting of FPC will be on September 30, 2020 and a record of that meeting will be published on October 08, 2020. 


    Related Links

    Keywords: Europe, UK, Banking, Insurance, Securities, COVID-19, Financial Stability Report, Stress Testing, Guarantee Scheme, Credit Risk, Brexit, Transition Period, LIBOR, FPC, BoE

    Featured Experts
    Related Articles

    EBA Finalizes Templates for One-Off Climate Risk Scenario Analysis

    The European Banking Authority (EBA) has published the final templates, and the associated guidance, for collecting climate-related data for the one-off Fit-for-55 climate risk scenario analysis.

    November 28, 2023 WebPage Regulatory News

    EBA Mulls Inclusion of Environmental & Social Risks to Pillar 1 Rules

    The European Banking Authority (EBA) recently published a report that recommends enhancements to the Pillar 1 framework, under the prudential rules, to capture environmental and social risks.

    October 31, 2023 WebPage Regulatory News

    BCBS Consults on Disclosure of Crypto-Asset Exposures of Banks

    As a follow on from its prudential standard on the treatment of crypto-asset exposures, the Basel Committee on Banking Supervision (BCBS) proposed disclosure requirements for crypto-asset exposures of banks.

    October 19, 2023 WebPage Regulatory News

    BCBS and EBA Publish Results of Basel III Monitoring Exercise

    The Basel Committee on Banking Supervision (BCBS) and the European Banking Authority (EBA) have published results of the Basel III monitoring exercise.

    October 18, 2023 WebPage Regulatory News

    PRA Updates Timeline for Final Basel III Rules, Issues Other Updates

    The Prudential Regulation Authority (PRA) recently issued a few regulatory updates for banks, with the updated Basel implementation timelines being the key among them.

    October 18, 2023 WebPage Regulatory News

    US Treasury Sets Out Principles for Net-Zero Financing

    The U.S. Department of the Treasury has recently set out the principles for net-zero financing and investment.

    October 17, 2023 WebPage Regulatory News

    EC Launches Survey on G7 Principles on Generative AI

    The European Commission (EC) launched a stakeholder survey on the draft International Guiding Principles for organizations developing advanced artificial intelligence (AI) systems.

    October 14, 2023 WebPage Regulatory News

    ISSB Sustainability Standards Expected to Become Global Baseline

    The finalization of the two sustainability disclosure standards—IFRS S1 and IFRS S2—is expected to be a significant step forward in the harmonization of sustainability disclosures worldwide.

    September 18, 2023 WebPage Regulatory News

    IOSCO, BIS, and FSB to Intensify Focus on Decentralized Finance

    Decentralized finance (DeFi) is expected to increase in prominence, finding traction in use cases such as lending, trading, and investing, without the intermediation of traditional financial institutions.

    September 18, 2023 WebPage Regulatory News

    BCBS Assesses NSFR and Large Exposures Rules in US

    The Basel Committee on Banking Supervision (BCBS) published reports that assessed the overall implementation of the net stable funding ratio (NSFR) and the large exposures rules in the U.S.

    September 14, 2023 WebPage Regulatory News
    RESULTS 1 - 10 OF 8938