FPC Proposes Changes to O-SII Buffer Framework for Banks

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