The Prudential Regulation Authority (PRA) decided to maintain, at the 2019 levels, the buffer rates for the Other Systemically Important Institutions (O-SII) for another year, with no new rates to be set until December 2023. This decision is relevant only to the ring-fenced banks and large building societies that will be subject to the O-SII buffer. The Financial Policy Committee (FPC) and PRA took this decision in response to the economic shock from COVID-19 pandemic. In addition, FPC published a report that complements its financial stability report and sets out its views on key financial stability issues in UK. The report accompanies a summary and record of the FPC meeting that was held on September 23, 2021, with the next policy meeting of FPC expected to be in November 2021.
As stated in the meeting record, FPC expects banks to use all elements of their capital buffers, as needed, to support the economy through recovery. To support bank lending to households and businesses as the economy recovers, FPC is maintaining the UK Countercyclical Capital Buffer (CCyB) rate at 0%. FPC has previously stated that it expects to maintain a 0% UK CCyB until at least December 2021. In line with the standard implementation period, any subsequent increase would not be expected to take effect until the end of 2022 at the earliest. FPC will also consult on a proposal to change the metric used to determine O-SII buffer rates to exclude central bank reserves, effective from the 2023 PRA assessment of individual firm buffer rates. FPC also welcomes the intention of PRA to continue to freeze O-SII buffer rates until that point.
An initiative that FPC already has in place is the Recommendations to limit a deterioration in the mortgage underwriting standards or a rapid build-up in the share of highly indebted households. FPC observes that the corporate debt vulnerabilities in UK have increased moderately during the pandemic and is due to finalize its review of the calibration of its mortgage market Recommendations in December 2021. The BoE communication also highlights the continued growth in cryptoassets and the associated markets and services, despite which such assets are still believed to represent limited direct risks to the stability of the financial system in UK. However, regulatory and law enforcement frameworks, both domestically and at a global level, need to keep pace with developments in these fast-growing markets to manage risks and maintain trust and integrity in the financial system. In the policy meeting statement, FPC also emphasizes that market participants should use the most robust alternative benchmarks available in transitioning away from use of LIBOR to minimize future risks to financial stability.
Keywords: Europe, UK, Banking, O-SII, Regulatory Capital, Basel, COVID-19, Systemic Risk, Financial Stability, CCyB, Cryptoassets, LIBOR, Interest Rate Benchmarks, FPC, PRA
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
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