FPC Amends Framework for O-SII Buffer for Banks in UK
The Financial Policy Committee (FPC) of the Bank of England (BoE) published a paper that presents consultation feedback and final policy (refer to Box 1A) for changes to the other systemically important institution (O-SII) buffer framework. The paper is relevant to Prudential Regulation Authority (PRA)-regulated ring-fenced banks and large building societies that are subject to the O-SII buffer.
Amendments are intended to ensure that the framework still addresses the key systemic risk intended by FPC: the risk that a distressed ring-fenced bank or large building society disrupts the supply of credit to the real economy. To this end, FPC
- amended the metric to determine O-SII buffer rates. FPC has changed the metric used to determine O-SII buffer rates from total assets to the UK leverage exposure measure. O-SII buffer rates should be determined based on firms’ average of quarter-end leverage exposure measure. The use of an average of firms’ quarter-end leverage exposure measure will not take effect until after the PRA’s December 2023 review of O-SII buffer rates. Thus the December 2023 review will be based on end-20022 leverage exposure measure. Rates set in 2023 would then apply from January 2025.
- recalibrated O-Sll buffer rate thresholds. FPC has adjusted the thresholds used to determine O-Sll buffer alongside the change in metric, to prevent an overall tightening or loosening of the framework relative to its pre-COVID level. FPC has calibrated this adjustment based on financial results from 2019, before the large expansion in central bank reserves during the pandemic. Previously, thresholds were expressed in terms of total assets. Following FPC’s amendments, the revised thresholds are expressed in terms of the UK leverage exposure measure.
As at December 2019, the UK leverage exposure measure for banks attracting an O-SII buffer was on average GBP 15 billion lower than those banks’ total assets. FPC has therefore reduced the previous O-SII buffer thresholds by a constant GBP 15 billion. This should prevent an overall tightening or loosening of the framework relative to pre-COVID levels. The final policy also sets out the revised asset thresholds for determining the O-SII buffer rates. Details of how the UK leverage exposure measure is calculated can be found in the UK Leverage Ratio Framework.
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Keywords: Europe, UK, Banking, Ring Fencing, O-SII, Regulatory Capital, Leverage Ratio, Basel, O-SII Buffer, PRA, FPC, BoE
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