FPC Proposes Changes to O-SII Buffer Framework for Banks
The Financial Policy Committee (FPC) of the Bank of England (BoE) proposed changes to the framework for the other systemically important institution (O-SII) buffer. In response to the review with respect to the third quarter of 2021, FPC is consulting to amend its framework to change the metric used to determine O-SII buffer rates from total assets to the UK leverage exposure measure. FPC is also proposing to recalibrate the thresholds used to determine O-SII buffer rates to prevent an overall tightening or loosening of the framework relative to its pre-COVID level. The consultation period ends on February 15, 2022.
The proposal aims 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. It achieves this in the following ways:
- First, it excludes from the framework central bank reserves, which grew significantly during the pandemic but do not reflect a bank’s potential to disrupt the credit supply. This exclusion mitigates the risk that future changes in central bank balance sheets inadvertently affect banks’ lending decisions by interacting with the O-SII buffer. It also allows banks to draw on central bank liquidity as necessary, without becoming constrained by the associated effect on buffer requirements.
- Second, the proposal brings into the framework committed but undrawn credit facilities. Experience during the pandemic suggests that these can form an important part of the credit supply in stress.
If the proposal is adopted, the changes would come into effect in time for the Prudential Regulation Authority (PRA) to assess rates under a revised framework in December 2023, based on end-2022 financial results. Rates set in 2023 would then apply from January 2025. This consultation is relevant to PRA-regulated ring-fenced banks and large building societies that are subject to the O-SII buffer.
Related Link: Consultation
Keywords: Europe, UK, Banking, Ring Fencing, O-SII, Regulatory Capital, FPC, Leverage Ratio, Basel, PRA
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